Should You Refinance Your Car?


The main reason people looks into refinancing their current vehicle is to get a better a rate and lower the monthly payment, there is nothing wrong with that. You've probably heard a salesperson say "you can take the vehicle at this rate now to build some credit and refinance later". While this is true, there are a few things I want to share with you before you make that decision.

How refinancing works?

The process of refinancing is very simple, basically, you are buying your car again on new terms. You can accomplish this by going to your own personal bank or credit union and doing a vehicle purchase application with them. If approved then your bank or credit union will pay off your current loan and you will start a new loan with them. Their goal is to offer you a better interest rate which most of the time will generate a lower monthly payment and keep you as their customer. Easy, right?

Although it's a simple process, you and your vehicle still need to meet the financial institution requirements. This means you need to qualify to refinance; and your vehicle needs to be appraised and meet the parameters for a loan, i.e. vehicle age and miles limit.

A lot of people are under the impression that they can refinance a vehicle after 1 year from when it was purchased because this is what they've been told by their salesperson. The reality is that in order to refinance you have to take into consideration important factors that have a direct impact in the bank's decision. The biggest factors will be the payoff and the market value of the vehicle.

So what can you do if you want to refinance?

My suggestion is if you had the car for over 2 years try to trade in. In some cases you might be able to lower your payment on a new car by taking advantage of the manufacturer incentives. Contact me to discuss what incentives you may qualify. If you still want to keep your car then you can do this:

  1. Find out what are the used vehicle rates for the bank or credit union you want to use. Shop around a few banks, they usually have that information online.

  2. Find out what is the current payoff for your vehicle.

  3. Find out what is the current market value for your vehicle. Contact me and I'll help you get it appraised for FREE.

  4. Find out what is your credit score. Remember the main reason is to get a lower rate, if your credit had some challenges in the time you had the vehicle you might not be able to secure better financing.

  5. Use this payment calculator to have and idea of what the payment will be if you qualify for the advertised rates and term of your own bank.Keep in mind the bank will use the market value of the vehicle. If you have negative equity, meaning your payoff amount is higher than the market value, you might have to cover part or the entire difference between payoff and market value in order to refinance.

To summarize let's see the PROS and CONS of refinancing:

PROS

a) Get a better rate. This will lower your financed charge.

b) Lower the payment. You may lower your payment by extending the term of the loan.

c) Cash equity. If the vehicle's market value is more than the payoff the bank may cut you a check for the difference and you can use that money for your personal use.

CONS

a) Longer time making payments. Sometimes you will "reset" the time when you refinance. For example, if you are 2 years in on a 6 years loan and decide to refinance with a new loan term of 6 years then you might end up making 8 years of payments.

b) Longer time to trade in. If you refinance with negative equity it will take more time to be in equity, specially if you don't put any money down.

c) Transaction fees. There will be fees associated to the transaction.

Before committing to refinance your vehicle, let me help you explore your options. Contact me and let's get started!

Featured Posts
Recent Posts