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Is It Time to Refinance Your Car?

Piggy Bank on Car Dashboard

You may be able to save a lot of money by refinancing your car, but is it time? If you’re asking yourself that question, read on to learn some good reasons for refinancing and some things you should consider as you get started.

Begin with your interest rate. Do you know how much you’re paying in interest on your car loan? If your credit score was low when you bought your car, you may be paying a high interest rate on your loan. If your credit score is better now, you can talk to your lender to find out if you can refinance your car to reduce your interest rate (and save a lot of money).

Do you have equity in your auto or do you own your car free and clear? You could potentially use that equity as collateral to pay off some of your higher-rate unsecured debt. You may also want to refinance if you are at the end of your car lease term and would like to buy the car.

Another good reason to refinance is to move your financing closer to home. Often, people finance their cars at a dealership, where their financing is handled by an out-of-state financial institution. By bringing the loan in-state, to your local credit union or bank, you can support your local economy and simplify payments for yourself. Instead of sending of a check each month, you can set up monthly transfers to a loan within your own bank and track both the loan and the payment within your own online banking portal.


Your credit score is the key to better interest rates

You will be in the best position for refinancing if your credit score is high (or has improved since you originally took out the loan). For example, if you bought your car when you had a credit score of 600 and you now have a credit score of 700, your interest rate could be reduced significantly when you refinance.


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Unfortunately, if you had poor credit when you originally financed your car, your interest rate may be so high that your monthly payments have gone toward the interest rather than the balance. This may mean that you are “upside down on your car” (you owe more than its worth). If this is true, refinancing may be difficult. If this is true, don’t give up. If your credit score has improved, your credit union or bank may work with you to find a solution.

Some other factors that your financial institution will consider as they determine whether or not they can refinance your car are the age and value of your vehicle. As your vehicle ages, its value decreases. If you owe more on your loan than the vehicle is worth (i.e. you’re upside down), it will be difficult to find a lender who will want to refinance your car.


Your loan to value calculation will determine how much loan you can get

One calculation that will determine whether or not you are able to refinance is your car’s “loan to value” ratio. This ratio is calculated by dividing your current loan amount by the value of the car.

For example:

Desired loan amount: $25,000 ÷
Value of your car: $20,000 =
Loan to value ratio: 125% (Whoa! This ratio is too high! You may not get the loan.)


Desired loan amount: $19,000 ÷
Value of your car: $20,000 =
Loan to value ratio: 95% (Perfect! You’re in good shape to get the loan.)

Your financial institution may have different guidelines for refinancing than they do for loan consolidation. For example, you may be able to finance at a higher loan to value (like 110% or more) if you are refinancing your car but only get a flat 100% if you are consolidating debt.


Two options for lowering your interest rates

You can usually refinance online. Generally, you will need a copy of your car’s registration form, insurance information, and your loan payoff amount. You will need to know the mileage on the car and will have to indicate which accessories your can has from a list. The process is usually pretty fast (unless you do it on a weekend, when the credit union or bank is closed). And if you don’t have Guaranteed Asset Protection (GAP) or Mechanical Breakdown (MBP) insurance, you can get them when you refinance.

If you simply want a new interest rate on the loan, you can also speak with your credit union or bank to see if they will reprice the loan. Not all financial institutions do this, so it will depend on the practices at your bank or credit union. Repricing is fairly simple and is based solely on your credit score. If you took out the loan when your credit score was low and it is now higher, you can get the loan repriced to a lower interest rate.


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About Christine Davidson

Christine Davidson is a former employee of VSECU. She has two children and lives with her husband in Northfield.
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