For many of us, we love the car we drive. It gets us where we need to go, hauls and protects what matters most, and feels like an extension of daily life. However, we often don’t feel as passionate about the monthly payment attached to it. Auto loans are among the largest expenses in most households, yet they are rarely updated once the paperwork is signed.
As a new year begins and financial resolutions are the new focus, it’s worth taking a moment to ask yourself: Does your current car loan fit your budget as well as it could?
Refinancing gives you the chance to adjust your loan in your favor. It’s not a sign that your original decision was wrong. Instead, it’s simply a check-in, the same way you might review your phone plan or insurance policy. In this article, we’ll highlight reasons you might refinance your auto loan and detail how the process works.
Why Many Auto Loans Go Unreviewed
Many people choose to finance their car loans at the dealership. By the time you’ve selected the car, discussed features, and negotiated a price, the financing portion can almost feel like a blur. The goal is usually to get on the road, not shop around for the best rates and terms.
Once you’re home and life returns to normal, the loan often fades into the background. Monthly payments get scheduled, and the details are easy to forget. But staying on autopilot can mean missing out on savings as interest rates shift and your credit score changes.
Taking a moment to revisit your loan may reveal that the terms you accepted a few years ago no longer match your current needs – and adjusting them could put a significant amount of cash back into your budget.
What Refinancing Really Means
Refinancing may sound complicated, but you’re simply replacing your existing car loan with a new one – ideally with lower rates. Your current loan balance will transfer over, and the new loan reflects updated terms that better fit your current situation.
When you refinance, you aren’t starting over from scratch. You’re not necessarily extending the life of the loan. You’re just moving your remaining balance into a loan that makes more sense for your finances today.
Members often consider refinancing their loans when:
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Their credit score has improved since they initially purchased their car.
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They need to lower their existing car payments to better match their budget.
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They want to reduce how much interest they are paying on the loan.
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Their savings goals or financial priorities have shifted.
Refinancing is a flexible tool, and one that many drivers don’t realize they can benefit from or avoid because it sounds complex and time-consuming.
Understanding Various Refinancing Strategies
Members switch their car loans to the credit union for a variety of reasons. The right approach depends on what you’re trying to accomplish. For example, some people might be looking for lower monthly payments, while others may want to reduce interest costs.
Here are three of the most common strategies people use when refinancing their car loans, along with simple examples to show how each works.
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Option #1: Lowering Your Interest Rate
We all want to lock in lower rates on our loans. This strategy is most helpful when market rates have declined, or your credit score increased since you first financed your vehicle.
How this Strategy Helps:
A lower loan rate reduces the amount of interest you’ll pay going forward. Your monthly payment may fall slightly, but the most significant benefit typically shows up in the amount you’ll save over the remaining life of your loan.
Example:
Assume you owe $22,000 on your current loan that is financed at 8% APR with 48 months remaining. Refinancing that balance at 5% APR with the same term would:
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Lower your payment by roughly $30 per month.
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Save you over $1,400 in interest over the remaining life of your loan.
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Option #2: Extending the Loan Term
Sometimes our financial priorities change, or life decides to throw us a financial curveball. If your goal is to create more breathing room in your budget, extending the term is often the most effective way to bring down the monthly payment.
How this Strategy Helps:
Stretching out your loan term can significantly reduce your monthly payments, though it may increase the total interest you pay. For many households, this trade-off can be worthwhile during financial setbacks or other transitions.
Example:
Suppose you owe $18,000 at 8% interest with 36 months remaining. Extending the loan to 48 months could:
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Drop your monthly payment by as much as $125.
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Cause total interest paid to increase by an extra $700-$800 over the life of your loan.
One thing to ask when extending your loan is whether there are prepayment penalties. These are fees some lenders charge to prevent you from paying the loan off early. If there are no prepayment penalties, you can make additional payments once your finances are back in order – helping to reduce any extra interest charges incurred.
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Option #3: Combining a Lower Rate with a Long Term
The most popular strategy when refinancing is to extend your loan term slightly while also locking in lower rates. This option provides both short-term relief and long-term savings.
How this Strategy Helps:
Locking in lower rates helps to reduce interest costs, while extending the loan several months makes the monthly payment easier to manage. Members often choose this option when seeking a balanced outcome.
Example:
Assume you owe $18,000 on your current loan that is financed at 8% APR with 36 months remaining. Refinancing that balance at 5% APR and extending the loan term by 6 months to 42 months would:
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Lower your payment by almost $100 per month.
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Save you over $600 in interest over the remaining life of your loan.
When Refinancing Makes Sense & When It Might Not
Most members are pleasantly surprised by how well refinancing their loan with the credit union benefits them. However, there are some instances when it’s best to stick with your current loan.
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Refinancing may be a good fit when:
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Your credit score has recently improved.
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Your current rate is noticeably higher than market rates.
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Your monthly payment feels too tight in your current budget.
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Your loan was originally financed at the dealership.
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Items to keep in mind:
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Vehicle Value: If you owe more than the car is worth, you won’t want to extend the loan term. That would risk putting yourself in a bad spot financially if your vehicle was ever in an accident or stolen. Responsible lenders will warn you and prevent this from happening when you try to refinance.
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Dealer Restrictions: Some dealer incentives may include waiting periods before refinancing is allowed. If you originally financed with a dealership, check your loan paperwork to determine if any limitations are included.
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Refinancing Fees: Some lenders charge fees when refinancing loans; however, these costs are usually low. But it’s still important to inquire and understand any associated charges.
How the Refinancing Process Works
Many people shy away from refinancing because they expect the process to be complicated. However, most are surprised to learn how quick and easy it can be.
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Step #1: Review Your Current Loan
Bring your loan details to the credit union or give us a call. We’ll help you compare your existing loan with available refinance options and provide guidance on which solution will work best for you.
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Step #2: Apply to Refinance
You can apply online, call, or stop by any branch during regular business hours.
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Step #3: Approval & Payoff
Once approved, the credit union will pay off your loan with the current lender and transfer the balance to a new credit union loan.
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Step #4: Start Fresh with Your New Loan
You will begin making monthly payments on your new loan with the updated rates and terms.
We’re Here to Help!
Financial goals and priorities change over the years. One of the easiest ways to provide more flexibility in your budget is to refinance your auto loan. You can instantly lower your monthly payments, reduce overall interest costs, or a combination of both. It’s a simple process that can rekindle the love you have for your car.
If you have questions about refinancing your auto loan or want to find out how much you could save, we’re happy to help. Please stop by the Credit Union or call 410-687-5240 to schedule an appointment with a member of our lending team.