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What is car refinancing and how does it work?

If you have an auto loan on a new or used vehicle and are getting tired of high monthly payments, auto refinancing could save you money if you can get a lower interest rate on the remaining balance of your loan.

How to refinance a car can be a little tricky. The first step is to shop around by talking to different lenders, such as your credit union or bank, about interest rates and loan terms.
You’ll apply for the new loan by supplying the necessary support documents (as you did for your current loan), such as earnings and debt, and wait for approval. During the approval process the lender will look at your credit score.
If you are approved for the loan, the remaining amount you owe on your first loan will be paid off and you will start making payments on the new loan, just as you did before.
At Credit Union of Southern California (CU SoCal), we make getting an auto loan easy!
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgages, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.

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Benefits of refinancing your auto loan 

Here is an overview of the benefits of refinancing an auto loan.
  1. You pay less interest. If you can find an interest rate that’s lower than your current rate, you could save hundreds or even thousands of dollars by reducing the cost of your loan.
  2. Lower monthly payment. If you can get a lower interest rate, you’ll pay less in interest and have a lower monthly payment (that’s assuming you don’t get a cash-out refinance).
  3. You can pay off your loan earlier. Refinancing to a lower interest rate provides the opportunity to shorten the duration or term of your loan.
  4. Potential for cash-out refinance. Some lenders may offer the option to provide a larger loan than is needed to pay off your current loan and take the additional funds out as cash. If you need cash to pay bills, getting a cash-out car loan refinance can help. Keep in mind your new loan will also cover the remaining balance on your original loan, likely resulting in a higher loan amount.
  5. Debt consolidation. If you have more than one vehicle with a loan, consider consolidating two loans into one using a refinance. This is only beneficial if you can find a good low interest rate.

Drawbacks of refinancing your auto loan

Here are some drawbacks of refinancing an auto loan that are important to consider:
  1. You could end up paying more interest. If you’re refinancing to lower your monthly payments by extending the term of the loan, you could end up paying more interest, even if you find a lower interest rate.
  2. Refinancing fees. Lenders charge fees to take your application and process the loan.
  3. Pre-payment penalty. Some loans have a fee for paying off the loan early. Ask your current lender about fees.
  4. You could end up upside-down. Refinancing could leave you with a loan that’s greater than the value of your vehicle. This is called being upside-down on your loan.

When does it make sense to refinance a car?

There are times when it might make sense to refinance your vehicle loan. Let’s look at each of these:
Your credit score has improved. If your credit score has improved and you have a significant about of time left on your current loan, you may be able to refinance to a new lower rate. Lenders offer lower interest rates to people with good credit.
Auto loan interest rates have declined. If you can find a rate lower than your current rate you may save money by refinancing.
Your current loan was financed through the dealer. Dealer interest rates are not always the lowest. Do some rate shopping online to compare your current rate to credit union auto loan rates, which are some of the lowest around.
You're struggling to keep up with payments. If you are having difficulty making the payments, refinancing to a lower rate can help you save money. However, if you cannot get a lower interest rate, you may need to consider trading in the vehicle or selling it and paying off the loan or reduce the loan by purchasing a lower cost vehicle. Run the numbers on this auto loan payment calculator.

When is refinancing a bad idea?

After considering the pros and cons of refinancing your auto loan you will probably know which option is right for your unique situation. However, there are times when refinancing may be a bad idea.
Your car is older. If your car has significantly depreciated in value, it’s probably not smart to refinance.
Interest rates are on the rise. Never refinance a loan to a higher interest rate.
You're near the end of your loan term. If you’re near the end of your loan, it probably doesn’t pay to refinance. You’d likely be better off paying off your loan early if there isn’t a prepayment penalty fee.
You'll incur prepayment penalties. Some lenders charge fees for paying off a car loan too soon.
Your credit score is too low. If you’ve had credit trouble since you were approved for your current loan, you may be turned down for a new loan or offered a higher interest rate than you have now.
Fees are too high. If your loan has a costly pre-payment penalty, and you will be charged for application fees and other fees, you’ll need to run the numbers to see if it’s worth it.
Many people ask, “Will refinancing my car hurt my credit score?” Your credit score may dip when lenders do a credit check (hard inquiry) to see your credit score, and if you apply to multiple lenders. Don’t worry, this reduced score recovers quickly as long as you keep making your loan payments on-time.

How to refinance a car loan

Here are the steps for how to refinance a car loan:
  1. Review Your current loan terms. Depending on the terms and conditions of your current vehicle loan, it could be too soon to refinance your car loan.
  2. Collect the Proper Documents. Be prepared with your driver’s license, proof of income, vehicle registration and information (including VIN), proof of insurance, and information for your current loan.
  3. Know your credit score. People with a high credit score are typically offered a better, lower interest rate on loans, because lenders see their credit profile as less risky, whereas people with a low credit score are usually offered a higher interest rate. You may find that it’s best to focus on improving your credit score for the time being.
  4. Shop Different Lenders. Each lender has its own terms and interest rates. Shop around and compare terms and rates before deciding.
  5. Run the Numbers. To justify refinancing your auto loan, there needs to be a benefit, whether that’s a more favorable loan term or a lower interest rate. Maybe it’s lower monthly payments that work better with your current financial situation.
  6. Look at the Loan Terms. Make sure you’ll really lower your monthly payment or be able to pay off your loan sooner. Read the fine print of the loan agreement and don’t be afraid to ask questions.

Alternatives to refinancing your car

Request a loan modification. If you are struggling financially, contact the lender and ask for a “loan modification.” Some lenders may offer options to ease the burden, such as temporarily pausing your payments or adjusting the loan terms based on current interest rates.
Trade it in for a less expensive car. A trade-in at a dealership for a less expensive vehicle could be an opportunity to eliminate your loan altogether, especially if your vehicle is relatively new and in excellent condition.
Sell it privately. Selling your vehicle privately may get you more money than trade-in value at a dealership. Weigh both options by speaking to a couple of dealerships before you decide.
Switch to leasing. Trading in a car or selling it could relieve the financial burden and you’ll pay off your loan in the process. Leasing a car typically costs less than buying a car, at least in the short term, because you aren’t paying toward owning the car. The average car lease payment is less than a monthly payment on a car purchase.

Is refinancing a car loan worth it?

Refinancing a car loan makes sense if you can get a lower interest rate, more favorable terms, and do not have to pay a hefty pre-payment penalty on your current loan.
That said, your new loan might have a longer term, which means you will pay more interest over time. You could also get a shorter loan term, which may mean your monthly payment is higher, but you pay less interest for the duration of the loan.
Run the numbers to determine which option is best for your unique situation.

Why savvy consumers choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.

Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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