Credit Shopper
If you are considering refinancing your car, you should only do so for the following three reasons:
1) You can get a better interest rate. If you can get a rate at least 1 percent better (and preferably 3 or 4 percent better), go ahead and refinance your auto loan. You won’t get much benefit from anything smaller than 1 percent. Mentally it may seem like 5.99% is better than 6.25%, but the reality is that they’re so close it’s not even worth your time.
2) Not being able to make payments on your car loan is another reason you should refinance. If you can’t afford the payments and may default on your loan, definitely refinance. If there is a possibility that your car will be repossessed in the next couple months, refinance as soon as you can if this will prevent repossession.
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.
However, if you’re thinking about getting equity out of your car so you can get money to pay other bills, you should know that this is NOT a good reason to refinance. Cars do not have equity since they are depreciating assets, and each day they are worth less than the day before.
If you owe less on your car than it is worth, you shouldn’t borrow against this equity since it won’t last very long. “Car equity loans” are offered by some banks but are never a good idea. Think about it this way. Would it be worth it to get a $100 today if that means you would have to make two years of extra payments on your car?
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 you decide that you should refinance, follow this advice:
Walk away if a bank is going to charge you large fees such as “loan origination fees” or “refinancing fees.” Only pay small fees like $20 for a new title or lien. The bank should not charge you for your business.
Never add more time to your car loan unless you are desperate to have your payments lowered. You shouldn’t refinance using another five-year loan if you originally financed your car using a five-year loan two or three years ago. In a case like this, the only thing refinancing has done is increased the amount of time you will have to pay on your car. If possible, refinance using a loan that will end when your original loan would have ended.
Check with your credit union. Credit unions have great rates, they want to help you, and they’re willing to work with you more than a regular bank will, especially if you’re in a situation where you’re at risk of defaulting.
RSS feed for comments on this post · TrackBack URI
Leave a reply