Automotive Journal

When it comes to refinancing your car, it’s important to realize that there are really only three good reasons to do so:

1) The first reason you should refinance your car is if you can get an interest rate that is at least 1% better than what you currently have. Although 5.99% is better than 6.25%, they are so close (less than 1%) that the difference is not enough for you to waste your time. However, if you are able to get an interest rate that is at least 1% better, you should seriously consider refinancing. If refinancing will get you an interest rate that it 3-4% better, you should definitely refinance your car loan.

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.

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.

Unless you’re at risk of defaulting on a major asset, don’t refinance. If you refinance for extra cash, you’ll regret it in two or three years when your car should have been paid off and you’re still making payments.

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.

Always check with your credit union. Not only do credit unions want to help you, they usually have excellent rates. They will work with you more than a regular bank will, especially if you are in a situation where you may default on your loan.