Auto Loan Refinancing

You’ve probably heard loads of stories about home loan refinancing on the news lately, but the subject of auto loan refinancing isn’t mentioned as often.  For some drivers, a car loan refinance can be a great choice to reduce the loan’s interest rate and monthly payments.  However, this type of financial move isn’t right for everyone – read on for more details on whether or not auto loan refinancing is right for you.

Purpose of auto loan refinancing

Typically, most people refinance their homes to either draw out equity or to qualify for new loan terms they weren’t originally eligible for.  In the first case, homeowners who have seen a significant appreciation in the values of their homes can take out new loans for the adjusted amount and pocket the rest for cash.  For example, if Bob and Jill originally purchased their home for $200,000 in 1985, and in 2009, it was worth $300,000, they could take out a new mortgage loan for the new valuation and pocket the difference.  On the other hand, homeowners who originally took out adjustable rate or interest only mortgages might refinance to 30-year fixed mortgages once they’ve built up enough equity.

But neither of these cases apply to auto loans – cars are depreciating assets, so you don’t build up equity in them that you can access with a refinance.  The real advantages of auto loan refinancing come in the lower payments and lower interest rates you can achieve with them.  If, for example, you took out an auto loan a year ago when your credit score was low, you may be able to qualify for lower interest rates if you’ve improved your rating since then.  The interest rate of your loan can have a big impact on the size of your payments, so it’s definitely worth looking into.

So should you do it?

There are a few things to take into consideration when considering whether or not to refinance your car loan.  The first is, as mentioned in the previous paragraph, your loan’s current interest rate and the rate you could qualify for now.  Consider the following example.  For a 48-month auto loan for $15,000 at 12% interest, your monthly payments will be roughly $395.  If, however, you can refinance to a loan with a 7% interest rate, your monthly payment drops to roughly $360.  This may not sound like much, but it does add up over the life of the loan.

The other thing to consider before refinancing is the amount of time left in your loan and the condition of your car.  Typically, lenders won’t refinance loans on cars older than 1996 or those with more than 80,000 miles on them.  Even if your car has some resale value left, it may not make sense for you to refinance.  If you have a year left on your original loan, refinancing to a three year loan will lower your monthly payments, but it does put you at risk of your car dying before the loan is up.  Consider your finances carefully before deciding to refinance – if you have only a short period left, it might be worth it to finish paying off the original loan.