Refinancing your car always sounds tempting when lower monthly payments could be on the horizon. In the grand scheme of things, there is more to think about than just lowering your monthly payment when deciding whether or not to refinance a loan.
Are there early repayment fees on your current loan?
Start with the loan you have now. Does that lender charge fees if you pay off the loan early? Depending on the interest rate and term of the new loan, this might not be a big deal, but it will definitely cut back on how much you are saving by refinancing. If the early repayment fees are hefty and the interest rate is just slightly better, it might not be worth it to refinance your loan. If there are no prepayment fees – go for it!
How much lower is the interest rate offered on the new loan?
Did your credit improve? Did you find a credit union offering a refinancing promo? Did you get a bad interest rate the first time because you just listened to the dealer? If the interest rate on the new loan is significantly better than that of your current loan, it is definitely something worth looking into.
How long have you had your current auto loan?
Since most auto loans are amortizing loans, meaning you pay a fixed monthly payment with interest included, you’ll want to refinance early. With amortizing loans, you pay down your debt but since most of your interest cost is paid at the beginning of the loan, you’ll want to decrease your interest rate sooner rather than later to really cut costs. If your loan is almost paid off, it is probably not worth it to refinance. Also, depending on the age of the car, interest rates may be higher than when you first financed the loan. Usually, the older the car, the higher the rate.
What is the term of the new loan?
If you’ve had your car for one year of a 5 year loan and then you refinance to another 5 year loan, you could be increasing the overall amount you’re paying for the car. Extending the loan term means another full year that you will have to pay interest that you would not if you stick with your current loan. Even though a lower monthly payment may sound tempting, doing it this way could end up costing you more in the long run. In this case, try to refinance into a 4 year loan – that way you will still be paying interest for around the same time period.
Don’t forget about the fees
There are costs related to refinancing, such as a new titling fee and administrative fees. Although these are usually not significant and can be rolled into the loan amount, they will eat into the amount you’re saving. If the amount you could save is pretty slim already, it is probably better to stick with the loan you have. If you’ll be saving hundreds with a new interest rate – this is just a small fee compared to what’s coming.
Refinance your auto loan with Patriot Federal Credit Union
If refinancing your car sounds like a good option, Patriot can help! Since we are a not-for-profit, our efforts go towards providing our members with the lowest auto loan rates possible, unlike the big banks who focus on making themselves a profit. Visit our website, find a branch location, or call us at 717-263-4444 to learn more about how much you can save by refinancing your auto loan with Patriot.