Should I Refinance My Car? | Auto Finance

By JasonLancaster
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When it comes to refinancing your car, it's important to realize that there are really only three good reasons to do so:

1) The first reason you should refinance your car is if you can get an interest rate that is at least 1% better than what you currently have. Although 5.99% is better than 6.25%, they are so close (less than 1%) that the difference is not enough for you to waste your time. However, if you are able to get an interest rate that is at least 1% better, you should seriously consider refinancing. If refinancing will get you an interest rate that it 3-4% better, you should definitely refinance your car loan.

2) You're at risk of defaulting on your car loan because you can't afford to make the payments. If you're one or two months away from repossession, by all means refinance your car.

3) The third reason you should refinance your car is to prevent defaulting on your home loan. If the payments on your auto loan are so high that you cannot afford to make mortgage payments, you must consider refinancing your car loan. If refinancing will lower your car payments, you will have more money to put towards your mortgage payments.

You should NOT refinance if your reason for doing so is to get equity out of your car to pay other bills. Since cars are depreciating assets, they do not have any equity. This means that every day they will be worth less than the day before.

Banks sometimes offer "car equity loans," but don't get sucked it. Even if your car is worth more than you owe right now, that won't last long. Borrowing against any equity you have today is always a mistake - all you're doing is stealing from your own future by adding more payments to your current loan. Would you rather make an extra two years of payments on your car so that you can have an extra $100 today? Probably not.

Unless you're at risk of defaulting on a major asset, don't refinance. If you refinance for extra cash, you'll regret it in two or three years when your car should have been paid off and you're still making payments.

If you decide that you should refinance, follow this advice:

Walk away if a bank is going to charge you large fees such as "loan origination fees" or "refinancing fees." Only pay small fees like $20 for a new title or lien. The bank should not charge you for your business.

Never add more time to your car loan unless you are desperate to have your payments lowered. You shouldn't refinance using another five-year loan if you originally financed your car using a five-year loan two or three years ago. In a case like this, the only thing refinancing has done is increased the amount of time you will have to pay on your car. If possible, refinance using a loan that will end when your original loan would have ended.

Be sure to consult with your credit union when refinancing. Their rates are excellent, and they really want to help you. Credit unions are more willing to work with a customer than a regular bank is, particularly when there is risk of defaulting.

About the Author

Author Jason Lancaster, a car industry veteran, developed AccurateAutoAdvice.com. You'll find accurate advice on refinancing an auto loan and when to refinance your car.

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