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Should I Refinance My Car?

Apr 7, 2008
If you are considering refinancing your car, you should only do so for the following three reasons:

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) 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.

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 refinancing is necessary, be sure to keep in mind:

Don't pay any fees unless they're minor (such as the $20 your bank may charge for a new title or lien). Walk away from "refinancing fees" and "loan origination fees," and other charges along that line. The bank should be happy for your business and shouldn't charge you for it.

Don't add more time to your loan. Unless you're desperate to lower your payment, try to get a loan that ends at the exact same time your original loan would have. For example, if you buy a car using a five-year loan, and in a couple of years you decide to refinance it, don't take out another five-year loan. All you'd have done is extend the amount of time that you'll be paying for your car.

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, an auto industry veteran, created AccurateAutoAdvice.com. You'll find accurate advice on when to refinance your car and refinancing an auto loan.
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