Automotive Journal

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) 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.

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.

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 you do need to refinance, keep the following 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.

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.