Is it time to refinance your auto loan? Auto payments can eat up a big slice of your monthly budget, putting a big strain on your finances. Whether you’re trying to save money over time or you need to cut your monthly bills, refinancing your auto loan could help.
But refinancing isn’t the right financial decision for everyone. Let’s weigh the pros and cons of refinancing your auto loan.
You should consider refinancing if…
- Interest rates have dropped. Even a small change could make a big difference to how much you’re paying in interest over the life of the auto loan — and the longer you have left on your term, the more you could save.
- Your financial situation has improved. If your credit score wasn’t in tip-top condition when you got your car loan, you probably didn’t get the best rates. Check your credit score —PenFed members who have a loan or line of credit can check their score for free online — and then check with your lender to see if you now qualify for a lower rate.
- You can find a better deal. Even if interest rates are the same and your financial situation hasn’t changed, you may have just gotten a higher rate with your initial auto loan. Check with your lender to see if you can get a better rate.
- You’re having trouble making payments. While refinancing for a longer loan term means you’ll pay more in interest, it will lower your monthly payments. Despite the expense, refinancing can give you immediate relief — and it’s a better option than defaulting on your auto loan.
You should probably avoid refinancing if…
- You’re close to paying off your loan. The closer you are to paying off your loan, the less refinancing will save you. Sometimes it’s best just to keep paying your existing loan, even if rates have dropped.
- The fees for refinancing outweigh your savings. Before committing to refinance, find out whether your existing loan has any prepayment penalties and what the fees are for refinancing will be. There’s a chance those costs are more than you’ll save.
You have an older vehicle. Not only can older vehicles be more difficult to finance — or finance at good rates — you can easily find yourself owing more than your
- vehicle is worth if you refinance an older model.
Before you refinance…
- Do the math. Every financial situation is different. Don’t assume that a lower interest rate will save you money. Look at what you still have to pay on your current loan and then compare it to what you would pay on a new loan at a lower interest rate.
- Consider what term you’d like. You can typically finance a vehicle for six years or more — but while a long term will give you low monthly payments, it means more costs over time. You don’t want to commit to a monthly payment you can’t afford, but you also don’t want to pay more in interest than you need to. Look for a sensible middle ground when choosing a term.
- Be wary of going upside down. If you aren’t familiar with the term, being upside down means you owe more on your auto loan than the value of the vehicle. Because vehicles depreciate the moment you drive them off the lot, there are times when you’ll owe more on your car loan than your vehicle is actually worth. If that’s the case, you could land into trouble if you total your vehicle in an accident or try to sell it, because the money you get from your insurance company or the buyer may not cover what you owe. This is where Gap Insurance may be a good option for peace of mind and security.
Consider refinancing your auto loan with PenFed
If you’ve decided refinancing is the right choice for you, consider refinancing through PenFed. Competitive rates are available to our members, with APRs as low as 1.49% to 2.74% for newer (2017/ 2016 model years) cars (and trucks) and APRs as low as 1.99% to 3.61% for used. You can refinance up to $100,000 with terms ranging from 36 to 72 months. You may even be able to get an instant loan decision online, so apply today to see if refinancing could help your finances.