Dear Chuck,

We refinanced our house a few years ago and just learned that people refinance cars too! How should we go about that? 

Lowering Car Loan Rate

Dear Lowering Car Loan Rate, 

My quick response is that you need to be very careful about refinancing a car loan! This is not something I have ever done, so the Crown team did some research to provide us with a look at the pros, cons, and alternatives. 

Auto Loan Refinancing

If you have a bad auto loan or payments that are too high, you may be able to reduce your monthly payment by refinancing. This involves replacing your current loan with one that has a lower rate and a different length. You may be paying a high rate if you financed a vehicle through a dealer. Your credit score will have a significant impact on the rate that you qualify for. See this chart for the possible rates available by credit score. Refinance only if lower interest rates are available or if your credit score has improved, which may qualify you for a better rate. 

Be careful. Extending the life of the loan may increase the overall interest you will pay. Shortening the loan’s length reduces the amount of total interest paid, but you must count any added fees. An auto refinance calculator can help you with the decision. 

“For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it?”

(Luke 14:28 ESV)

Get educated. Check with different banks, credit unions, and online lenders. Those that offer pre-qualification with a soft credit check will not affect your credit score until making your final decision. The score may drop temporarily, but a history of timely payments will correct it.   Compare all terms, rates, and fees. 

If you currently have a prepayment penalty, it could reduce or cancel any possible savings.

If a new lender pays off the old loan, follow up to verify. Some lenders provide funds for you to pay off the debt. Also, some will transfer the title, but you may need to re-register the vehicle. 

You may not qualify if:

• Late payments appear on your loan.
• Your credit score is too low.
• You have negative equity—the vehicle is worth less than what you owe. 
• Your vehicle is too old or high in mileage.

You need the following:

• Driver’s license and vehicle registration.
• Proof of insurance, income, and residency.
• Social Security number.
• Details of your original loan (the lender can email it).

Try checking auto refinancing rates here:

• Money.com
• The Balance
• BankRate.com
• Investopedia

The Better Option

The best alternative is to sell the car and buy one you can afford—with cash. If you can’t make that happen, continue to make payments on time, and get prepared to avoid borrowing for a car in the future. 

Once the current vehicle is paid for, continue making payments into a savings account designated for future car replacement, as if the loan had not been paid. Drive your paid-off car as long as you safely can or until you can sell it for a decent price; then aim to pay cash for the next one. Buying one that’s a couple of years old means that someone else pays for the depreciation. 

If You Are in Dire Straights 

When there’s an emergency need for cash, a cash-out auto refinance loan or cash-back refinancing is available. You tap into the equity (the difference between value and amount owed) for cash. I recommend this for emergencies only. The risk is high of getting upside down on payments or having an accident and insurance only covering the current value of the car. You are at the mercy of the insurance company, and you have to pay the remainder of the loan. The interest rates can be extremely high. Let me emphasize that this would be the worst-case scenario and option of last choice. 

Be Patient 

We are in a rising interest rate environment right now. Many are forecasting much lower lending rates over the next twelve to eighteen months. I hope you will take the opportunity to not only avoid refinancing but also to avoid financing a vehicle in the future. My wife and I have not paid interest on a car loan for almost 25 years by paying cash for used cars. It has been a blessing for us and will be for you as well. 

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