Refinancing your auto loan is a great way to lower your monthly bills, and the process is much easier than you may think.
Money expert Clark Howard says that nearly everyone with a car loan should consider refinancing because it could be a quick way to save some cash.
“Auto refinancing is such an interesting thing because almost nobody ever refinances a car loan, but overwhelmingly most people could benefit from refinancing a car loan.”
In this article, I’ll walk you through Clark’s rule for knowing when you should look into adjusting your auto loan, and I’ll share some tips for getting the process started.
We’re all about lower monthly payments here at Clark, but we want to make sure that you’re doing it the right way.
While it might help your monthly budget to refinance a 60-month loan into a new 84-month loan, pushing out the payoff date is actually a poor decision.
Cars depreciate in value, and you don’t want to still owe money on a vehicle when it comes time to trade it in. If you hold onto your cars for a long time (and good for you if you do), you know that, toward the end of your vehicle’s life, there are going to be some repair bills. You really don’t want to have a car payment at that point.
Clark says that any refinance for an auto loan should both lower your monthly payment (by way of an interest rate reduction) and shorten the period of time until you’ve paid off the debt.
“The key is that you go into a new loan term that is equal to or shorter than your existing loan,” Clark says. “Even with low rates, there is no advantage to carrying a long-term auto loan.”
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Let’s say that you bought a new vehicle for $30,000 six months ago. You took out a 72-month loan at an interest rate of 9%. Now you have 66 payments of $ remaining with a balance of approximately $28,069.
If you refinance into a 60-month loan at a 3% interest rate at your local credit union, you’ll be able to lower your monthly payment to $ and still pay off your loan six months sooner!
2. Upside Down? Your Current Loan May Present a Common Refinance Stumbling Block
Clark says that the biggest stumbling block people may face in refinancing their car loan is that they may have financed too much of the purchase.
This can happen in a number of different ways. You may have just plain paid too much for the car, or it may have depreciated in value more quickly than you’ve been able to make the payments.
No matter the path, the end result is that you’re “upside-down” on your loan: You owe more on the loan than your automobile is worth.
“Unless you can buy down the balance on the existing loan to the level at which the new lender will value the vehicle, you cannot refi,” Clark says.
But Clark says, if you can afford to buy down the balance and still meet his rules for refinancing an auto loan, you should go for it.
3. Credit Unions Are the Place To Shop for Auto Loan Refinances
Clark says that, with some rare exceptions, your search for a refinanced auto loan should begin and end at a credit union.
Clark says they’re most likely to have the best interest rates, and they’re more likely than a bank to accept you as a customer for this type of loan.
“Credit unions almost always are going to be the cheapest place,” Clark says. “Credit unions tend to use a sliding scale to find a loan for you. You have to really, really have horrendous credit for them to just flat turn you down.”
The factors used for that scale, which ultimately determines what interest rate they offer you, can include things such as your credit score, the loan amount, desired loan length, age of the vehicle and your payment history.
If you’re not able to access a credit union, Clark recommends checking your eligibility for USAA membership. They offer competitive auto loan rates as well.
Clark says many USAA members are also eligible to join one of the military credit unions such as Navy Federal. He suggests comparing the rates between both if you’re eligible.
“The one place you never want to do the refinance of a car loan is at a bank, Clark says. “The banks charge so much higher interest rates than credit unions on vehicle loans.”
Final Thoughts
Just make sure that you’re not lengthening the term of your loan in the process. That way you can stay on track to rid yourself of a monthly car payment as soon as possible.
Clark says that you’ll probably get the best interest rate at a credit union. He is a member at Navy Federal, but you can also find great rates at a local credit union in your community.
“Since it’s so clear how much cheaper it is to refinance out of a dealer loan and into a credit union loan, please remember when you’re purchasing a car that you should always get your financing in advance from your credit union,” Clark says. “Next time you’re going to save money from the start. And it can be thousands of dollars over the life of the loan!”
