Should I Refinance My Car?
If all of the following are true, you may qualify for, and stand to gain from, refinancing your car, truck, RV, or motorcycle.
- I am not behind on my loan payments.
- My current or a competing lender is offering a lower interest rate of at least 1%, and without forcing me to extend the current loan repayment term (extending the repayment term may more than offset the lower rate) or pay a fee just to apply.
- My car is fairly new, and I'm still in the first half of the total repayment term (it may be difficult to find lower rates for older cars, and greatly reduced balances won't offer as much in interest savings).
Note that some financial advisors will tell you that another good reason for refinancing is to cash out the equity in your car to pay off high-interest debt.
For example, if you still owe $10,000 on a vehicle valued at $15,000 (price it would sell for), you would have $5,000 worth of equity ($15,000 value less $10,000 loan balance).
If you follow this type of advice, you could refinance your vehicle for $15,000, pay off your $10,000 auto loan, and have $5,000 in cash to pay off high-interest credit card debt.
My problem with that advice is that you are trading non-secured credit card debt for secured debt, which is not something I'm in favor of.
If I wanted to cash out the equity in a vehicle to pay off high-interest debt, I would sell the car for $15,000 and buy a $10,000 used car. That way I would have $5,000 cash to pay off high-interest debt, without trading unsecured debt for secured debt.
How Much Does it Cost to Refinance a Car?
Fees for refinancing a vehicle loan are usually minimal. When refinancing from reputable lenders, fees are normally limited to lien transfer and registration fees, which run between $10 and $100 combined.
Unscrupulous lenders, on the other hand, may come up with a host of other fees to make up for a lower rate offer. Therefore it's important to weigh the total cost of the loan (interest plus fees) when comparing refinancing offers.
If you're not sure what rates are available to you, you can visit Lending Tree's website to compare auto refinance rates based on your credit score. You might also check with your local credit union as they tend to offer low rates for auto loans.
How Does Refinancing a Car Work?
Refinancing an auto loan usually involves two or three simple steps.
- Call your lender and get the current payoff amount and interest rate of the loan.
- Ask your lender if you now qualify for a lower rate. If your lender says yes, and the fees are reasonable, ask to refinance your current loan with them. If your lender says no, shop around for other lenders who offer a lower rate. If you can't find a lower rate, there's little reason to refinance.
- If you do find a lower rate than what you're paying, and the total cost of refinancing will end up saving you money, fill out a loan application with that lender. If your loan is approved, your new loan is then used to pay off your old loan.
Caution: "Savings" Can Mean Higher Cost
Throughout my career of building online calculators I have continually encountered mortgage, student loan, and auto refinance calculators that use the term "monthly savings" when referring to a lower monthly payment.
In my opinion, this is false advertising, because in many instances the lower monthly payment will only serve to increase the cost of the existing loan.
How can that be?
Well, if the smaller payment must be made for a longer period (higher number of payments), then the total of all lower payments can be more than the total of the smaller number of higher payments.
The only way to tell whether or not refinancing will save you any money is to calculate the total interest cost from now through the end of the original loan, and then calculate and compare the interest cost from now to the end of a refinanced loan (including any applicable refinancing fees).
If the total interest cost and fees for the refinanced car loan add up to less than the total interest cost for the existing loan, then yes, refinancing will save you money.
Otherwise, if the total interest cost and fees after refinancing are greater than the total interest cost of the existing note, then no matter how low the payment is, refinancing is not saving you money ... it's costing you money.
Please keep this in mind when using any refinance calculators that are not located on free-online-calculator-use.com. I will never use the word "savings" unless actual savings have been calculated to exist.