Should I refinance my auto loan?


If you’re making high monthly payments on a car or a truck, it’s worth checking out whether you could save money by refinancing your auto loan. With today’s interest rates hovering near historic lows, you might be in a position to get a better deal on your loan.

For example, if your credit score has improved since you bought your vehicle, or if your original auto loan was at a significantly higher interest rate than you could get now, refinancing could cut your interest costs, resulting in a lower monthly payment.

Of course, interest rates won’t stay low forever — economic forecasters say they may start going up in the near future. Here are some of the basics of refinancing an auto loan.

Benefits of refinancing

While it may sound complicated, refinancing is actually pretty simple. Essentially, it involves taking out a new loan — with a new interest rate, loan length and principal amount — that replaces the original loan you used to buy your vehicle. You then make monthly payments on that new loan.

An auto loan, unlike a personal loan, is secured by a physical asset — the vehicle you bought with it. Assuming your vehicle is in good condition, refinancing the debt is similar to refinancing a home mortgage, only simpler. If you’ve been making timely payments on your current loan — and on your other bills — it’s possible that your creditworthiness has improved, making you eligible for lower rates. Even if your credit score is about the same, a drop in overall market rates could reduce what you pay each month if you refinance.

When you refinance, you’ll have an opportunity to work with a new lender to adjust the terms of your auto loan so that they better fit your current financial situation. If you have some cash to put down, you could decide to reduce the amount of the new loan, leaving you with a lower principal amount. Conversely, for buyers who made a substantial down payment on their vehicles years ago, today’s lower rates may make it possible to extract some of that cash — while possibly still ending up with a lower bill each month.

Your credit union can help

Whether your original auto loan was arranged through your car dealership, a credit union, bank or finance company, you are free to shop around for a better interest rate from any lender when you refinance.

Don’t overlook the potential benefits of getting a car loan through your credit union. Though they may not leap to mind when you’re thinking about vehicle financing, credit unions can offer affordable and accessible car financing.

As nonprofit organizations, credit unions generally offer their members significantly better interest rates on auto loans than large banks and other lenders do. They can also help members refinance existing car loans. Credit unions financed more than 22% of used car loans during the second quarter of 2015, according to research firm Experian Automotive.

In addition to competitive rates, credit unions may offer advantageous auto loan terms, including flexible repayment schedules. For instance, financial institutions like Statewide Federal Credit Union will delay the first payment on a new or used car loan for 90 days. Credit unions often offer their members loan terms up to 84 months and financing for up to 100% of the value of the car.

It may be easier for borrowers with less-than-stellar credit to obtain loans through credit unions, too. Because credit unions exist to serve members, they can take a more personalized approach to lending. They can be especially helpful for millennials, many of whom haven’t had time to build up strong credit histories, according to NerdWallet’s millennial credit score research.

Local credit unions specialize in lending money for exactly such purposes, so they can walk you through the whole process — which could take less than an hour to complete. For the money you could save over the term of your loan, that’s time well spent.

John Stephens and Jeanne Lee, NerdWallet


































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