Consider This Before Refinancing Your Car

Is it a good idea to refinance my car?

First off, let’s talk about the main reasons why you would refinance your auto loan.

Reduce Your Interest Rate
Lower Monthly Payment

Here are some things to consider when deciding whether or not refinance your auto loan.

Loan Balance vs. Car Value

One of the first things to consider is the amount that is remaining on your loan and the value of your car. The value of an car drops very quickly due to wear and tear. This is called depreciation. Unlike a home, the value of a car can drop significantly even after the first month of owning it. To find out what your car is worth, we recommend using NADA.com. You can search for the make, model, year, trim packages and condition to find out the Retail or Trade-In value of your car. If you owe more on your loan than your car is worth, then refinancing might not make sense.

Penalties for Prepayment

You should check with your lender and make sure there are not prepayment penalties on your loan. Prepayment penalties vary depending on lender and state. In states where penalties are allowed, they are commonly assessed on loans under 48 months. However, in some states, they are banned on loans longer than 60 months (5 years). Ascent Credit Union does not have prepayment penalties.

Time Remaining On Your Loan

Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month — but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.

Increase in Credit Score

If you have improved your credit score since you first opened your auto loan, it might be worth it to see if you could get a better rate and term based on your new credit score. If it is not a significant difference, it may not be worth it. You can check with your lender to find out if it would be beneficial.

Lower Interest Rates

Interest rates are at a record low currently. Check the interest rate on your loan and see if you could get a lower interest rate with a refinance. Lowering your interest rate would help pay off the loan faster, especially if you are making the same payment each month. This is the most common reason people refinance their cars.

Change in Income

Refinancing your auto loan could lower your monthly payment. If you have had a decrease in income, this might be helpful to lower your monthly payment and give you more cash in your pocket for other expenses. A word of caution, this could change the term of your loan and you could be paying more in interest in the end.