For many people, shopping for a new car is a pleasure until it’s time to get down to the business details, like negotiating the price and arranging the financing. By then you’ve smelled the new interior, gawked at all the new gadgets, taken a test drive, and just want to hit the road in your shiny new ride. You’re happy – and probably a bit relieved – when the dealer handles the financing and hands you the keys.
In a few weeks, after the excitement wears off a bit, you may realize the dealer-arranged loan isn’t so great; the interest rate is higher than you expected, and it’s squeezing your budget. It may be time to consider a refinance.
When does refinancing a vehicle loan make sense?
We’re all familiar with refinancing a home mortgage. People do it all the time – often lowering the interest rate and saving hundreds on their monthly payments, but few people think about refinancing a vehicle loan. However, many of the same benefits apply. So, when does refinancing make sense?
- If you didn’t get the best rate available at the time.
Perhaps in the rush to buy that car or pickup, you didn’t shop around first for the best rates with local lenders. Credit unions in particular are known for offering favorable interest rates on auto loans to members.
Visit smcu.com/auto to learn about our auto loan special with rates as low as 1.49% APR1.
- If your financial situation has improved since you got your loan.
Maybe you were going through a financial rough patch at the time, but your credit score has improved. These ratings are “tiered,” meaning even just a moderate gain can bump you up to the next level and earn you a lower interest rate from your lender. You may even discover a mistake on your credit report that cost you a better rate. Get a free credit report from the AnnualCreditReport website to check for errors. If you find one and have it corrected, it may be a good time to look into refinancing your vehicle.
- If you need to extend your repayment term to cut your payment.
If your monthly car loan note is busting your budget, refinancing to stretch out the repayment period for a longer loan term may help you. For example, if you have 24 months left to pay on the current note but can refinance it for 36 months at a comparable or lower interest rate, your monthly payments will fall. You may pay more in total interest over the life of the loan, but it might be worth it to give your monthly budget a bit of a break.
Credit Unions Offer Great Loan Features the Dealers Can’t Match
Because credit unions operate exclusively for the members’ benefit, they often have unique loan features and programs that you might not be able to get from a commercial bank.
Some credit unions allow members who face a cash crunch to skip a loan payment now and then. Programs such as Seattle Metropolitan’s Anytime Skip-A-Pay lets borrowers pass on up to two payments every twelve months2. Don’t even bother to ask a car dealer for that luxury!
GAP and MBP at Lower Prices than the Dealer
If you bought a brand new car, you likely lost a lot of value when you drove off the lot. If your car gets totaled in the first few years you own it, you could be on the hook for the difference between what the car is worth and what your insurance company will pay. GAP coverage can make up the difference, so you don’t have to pay for a car you can no longer drive.
Mechanical Breakdown Protection (MBP), also called Extended Warranty, can protect you from expensive car repairs that aren’t covered by the original Manufacturer’s Warranty. Having an MBP policy could prevent you from having to pay for that new transmission out of your savings, which can be a major ding to your budget.
You can usually buy GAP and MBP from the dealer, but if you purchase them from your credit union, you can often save hundreds or even thousands of dollars for this helpful protection. Plus, you can usually add the policies when you refinance, even if you didn’t get them when you bought your car.
The Sooner You Refinance, the More You Can Save
If you’ve only had your vehicle a few months, you may think it’s too early to refinance. That may not be the case. You usually pay more interest than principal in the early stages of a loan, so if you can get a lower rate, the sooner you refinance, the more you may save.
To see if a refinance makes sense in your situation, talk to a representative at Seattle Metropolitan Credit Union. Feel free to stop by a branch or call us at (855) 575-9352, and we’ll answer any questions you might have.
Hal Bundrick, NerdWallet
1APR is Annual Percentage Rate, effective as of 7/1/2014. APR reflects any prepaid finance charges and is subject to change without notice. Rates and financing are offered based on applicant’s credit qualifications and other underwriting criteria. Longer terms and vehicle model year and mileage may result in higher APR. Example based on qualifying loans up to 80% LTV on term of 3 years or less.
2See smcu.com/skip-a-pay/ for eligibility requirements and disclosures.