When to Refinance Your Car

When to Refinance Your Car

If you're considering refinancing your auto loan, it's important to understand if a refinance is right for you.

What Is an Auto Loan Refinance?

When you refinance your auto loan, you’re replacing one loan with another to get terms that you find more favorable. For example, the new loan may have different terms or features than the original, such as a lower interest rate or monthly payment amount. Or, you may be refinancing to remove a cosigner or to bring your loan to a financial institution where you do other banking.

When Refinancing Might Make Sense

Though it depends on your unique financial situation and needs, there are times when it can be beneficial to refinance an auto loan. Let's take a further look.

It Reduces Your Interest Rate

You might choose to refinance your auto loan if you can reduce your interest rate. For instance, let’s say you had found the perfect car and you just had to buy it.  Maybe you didn’t take time to research auto loan rates and simply took financing through the dealership that had the car. Though this can be convenient and provide other advantages, it can also limit one’s ability to compare loan rates and terms. The rates offered by auto dealerships are generally very competitive, but they may not always be the lowest.

Obtaining financing without comparing options isn't the only time one might consider refinancing to get a lower rate. Suppose you have seen a significant improvement in your credit score or income situation. This could provide you with the opportunity to shop around to see if your improved financial stituation could save you money.

When you can take your time to compare loans from a few financial institutions, you may find a lower rate. The interest rate is the cost of the loan, so a lower rate can lead to substantial savings over the life of the loan.

It Lowers Your Payments

Another reason you might choose to refinance is to lower your monthly payments by getting a longer loan term. For example, maybe you’re struggling with your payment or other monthly bills. If that's the case, refinancing could potentially lower your payment to help make ends meet.

It's important to note that extending the loan term can also increase the total amount of interest one pays over the life of the loan. While this approach can cost you more over time, it can be a smart move if it will prevent missed payments on a car loan or other debts.

You Want to Tap Into Your Equity

Another reason you might consider an auto loan refinance is to get cash. If you've owned your car for a while, it may have built up equity. Equity is the difference between what you owe on your loan and the actual value of your vehicle. Positive equity means your car is worth more than you owe. Negative equity—often referred to as being "upside-down"— means you owe more on your vehicle than it’s worth.

You may be able to tap into your equity through a process called a cash-out auto refinance. This approach allows one to take out a new loan for more than they owe on their current car loan. They can then use the money for any purpose they choose, like home improvements, a vacation, or consolidating high-interest debt.

When Refinancing Might Not Make Sense

Now that we've covered the potential benefits of refinancing an auto loan, let's look at the other side of the equation: when refinancing might not make sense. Here are a few instances when you might think twice about refinancing.

You’re Close to Paying Off the Loan

If you only have a few months or years left on your car loan, refinancing may not make sense. For instance, there may be fees involved in a refinance. This means that extending the length of the loan could result in additional expenses. In this case, it may be worth staying with the current loan and focusing on paying it off as quickly as possible.

Your Credit Score Has Gone Down

If your credit score has decreased since taking out your current loan, you may not qualify for a lower interest rate. In this situation, you may be better off skipping the application process, as applying for the loan could further reduce your credit score. Instead, it may be beneficial to work on improving your credit score, in part by continuing to make payments on their current loan.  A Member Solutions Specialist from Heartland can help you improve your credit score with a few simple strategies.

You Plan to Sell the Car Soon

If you are planning to sell your car in the near future, it may not make sense to refinance. Similar to if you're close to paying off the loan, you may have to pay fees to refinance. As a result, you may not benefit from a lower interest rate because they won't have the loan long enough to make up for any additional costs.

In Summary

When considering an auto loan refinance, it's important to weigh all of your options and look at the potential benefits and drawbacks of each. An HCU staff member would be happy to work through different scenarios to see if refinancing makes sense for your particular needs.  If you’d like to visit with a Member Solutions Specialist, give us a call at 800.428.8472.

Darren Werth
Darren WerthAVP of Marketing

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