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Car Loans: When to Refinance

Apr 7, 2008
There are only three reasons why you should refinance you car:

1) You can get a better interest rate. If you can get a rate at least 1 percent better (and preferably 3 or 4 percent better), go ahead and refinance your auto loan. You won't get much benefit from anything smaller than 1 percent. Mentally it may seem like 5.99% is better than 6.25%, but the reality is that they're so close it's not even worth your time.

2) The second reason you should refinance your car is if you can't afford to make the payments. If you are a couple months away from repossession or are at risk of defaulting on your auto loan, you should refinance your car loan right away.

3) Not being able to afford payments on your home loan is a definite reason why you should refinance your auto loan. This will only work if refinancing your auto loan will lower your car payments. Then you can use the money you save on your car loan to pay your mortgage.

Do NOT refinance your car in order to get money to pay other bills. You will not be able to get any money from the equity in your car because cars do not have any equity. A car is a depreciating asset, which means that it is worth less tomorrow than it is today.

If you owe less on your car than it is worth, you shouldn't borrow against this equity since it won't last very long. "Car equity loans" are offered by some banks but are never a good idea. Think about it this way. Would it be worth it to get a $100 today if that means you would have to make two years of extra payments on your car?

Only refinance if you are at risk of defaulting on a major asset. You will regret it in a couple years if you refinance for some extra cash when you could have been done making payments on your car if you hadn't.

If you do need to refinance, keep the following in mind:

The bank should not charge you for your business. Unless the fees are minor such as the $20 for a new lien or title, walk away. Do not pay big charges like "financing fees" or "loan origination fees."

If you are going to refinance, do not add any more time to your car loan unless you are really desperate to lower your payments. For example, let's say that you took out a five year loan when you bought your car three years ago, so you only have two years left of payments. When you refinance, you shouldn't take out another five-year loan because now you will be making payments for another five years when you would have been done in two. All refinancing has accomplished is extending how much time you will be making payments on your car. When you refinance, get a loan that will end at the same time your original loan would have ended.

Check with your credit union. Credit unions have great rates, they want to help you, and they're willing to work with you more than a regular bank will, especially if you're in a situation where you're at risk of defaulting.
About the Author
Author Jason Lancaster, an auto industry veteran, created AccurateAutoAdvice.com. You'll find accurate advice on how to refinance your car and auto loan refinance.
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