When you purchased your car, you probably didn’t buy it on a whim. Instead, you researched vehicles to find the one that best matched your lifestyle. Perhaps you needed an SUV for your growing family. Or you wanted a car with excellent gas mileage for commuting. Regardless, your car reflects you and your personality – and you love your car.
But what about the payments? It’s exciting buying a new car, and it’s easy to get distracted. Then, months later, you realize the payments might be more than you prefer. Luckily, lowering your auto loan payments is pretty easy through a process called refinancing.
What is Refinancing?
Don’t let the term “refinancing” scare you into believing the process is complex, expensive, or time-consuming. It simply means replacing your current loan with a new one to obtain more favorable terms, such as lower payments.
Two Ways to Refinance Your Loan:
- Existing Lender: Some lenders will allow you to refinance your current loan depending on the reason and terms. However, your options might be limited if you’re simply trying to lower your payments. While this favors you, the lender usually loses money while still assuming the same level of risk.
- New Lender: Transferring your loan to a new lender is the more common approach to refinancing. For example, if you originally financed your car with the dealership, you could switch your loan to the credit union. This situation is ideal if you’re trying to obtain a loan with terms that better fit your budget.
Strategies to Lower Your Payments:
Lowering your auto loan payments by refinancing generally happens in one of three ways:
- Obtaining lower interest rates.
- Extending the length of the loan.
- A combination of both 1 & 2.
To illustrate how each option will affect your loan payments, review the following scenarios.
The examples below will use the following loan information:
| Loan Details: | Dollar Amount: |
| Loan Amount | $30,000 |
| Length of Loan | 60 Months (5 Years) |
| Interest Rate | 6% APR |
| Monthly Payment | $579.98 |
| Total Interest Paid | $4,799.04 |
| Loan Balance After 12 Months (1 Year) | $24,695.90 |
- Obtaining Lower Interest Rates.
Qualifying for lower interest rates usually happens in two ways:
- Interest rates have declined since you originally financed your loan.
- Your credit score has improved since you purchased your car.
Using the figures above, assume it’s been 12 months since you financed your car. You now qualify for a lower interest rate of 4% APR. Keeping the rest of the loan the same, lowering your interest rate to 4% APR will yield the following:
- New Monthly Payment: $557.61 (Savings of $22.37 monthly)
- Total Interest Paid: $3,725.09 (Savings of $1,073.95)
Result: Lowering the interest rate will drop your monthly payment slightly. But the biggest savings in this method comes from the total amount of interest paid over the life of your loan. In this example, you would save a whopping $1,073.95!
- Extending the Length of the Loan.
Using the figures above, assume it’s been 12 months since you financed your car. You decide to extend your loan term from 48 months to 60 months. Keeping the rest of the loan the same, extending the loan term by 12 months will yield the following:
- New Monthly Payment: $477.44 (Savings of $102.54 monthly)
- Total Interest Paid: $5,606.27 (Increase of $807.23)
Result: Extending the loan term by 12 months causes a significant drop in your monthly payment ($102.54). However, it also causes you to pay more interest over the life of your loan (an extra $807.23). This could be an ideal option if you’re facing a financial setback and need to free up extra money in the short term.
- Combination Refinance.
If your goal is overall savings, lowering your interest rate and extending the loan term will deliver optimal results.
Using the figures above, assume it’s been 12 months since you financed your car. You now qualify for a lower interest rate of 4% APR and choose to extend the loan term by 12 months. This scenario will yield the following:
- New Monthly Payment: $454.81 (Savings of $125.17 monthly)
- Total Interest Paid: $4,248.57 (Savings of $550.47)
Result: The combination of lowering your interest rate and extending the term yields the best results. Your monthly payment significantly drops to $454.81 (a savings of $125.17 monthly). Your total interest paid also declines by $550.47. It’s a win-win!
How Refinancing Works:
Refinancing your auto loan may sound tedious, but the process is simple and quick.
- Contact the Credit Union: If you’re unsure if refinancing will benefit you, contact us before you apply. We’ll run the numbers with you, and your credit score won’t be affected if you decide not to move forward.
- Apply: Bring in your current loan paperwork to any branch location or apply online 24/7 via digital banking. Our team will review your application and work to get you approved.
- Payoff: Once approved, our team will pay off your existing loan with your current lender.
- New Loan: The credit union will create a new loan reflecting the more favorable terms and lower monthly payments.
- Love Your Payments: Now…you’ll love your car and the monthly payments!
NOTE: Some lenders charge fees for refinancing. These costs are typically minimal and will often be rolled into your loan so that you pay nothing upfront.
Things to Consider:
While refinancing replaces your existing loan with a more favorable one, there are some things to consider. First, extending the loan term too far could result in you owing more than the car is worth. Luckily, our team will inform you if this is likely to occur and advise against it.
Second, some dealerships will lock you into your loan – meaning you can’t refinance for a set period. While it’s not too common anymore, this usually happens when accepting certain dealer incentives. For example, you get $1,200 off MSRP, but you cannot refinance for a certain number of months. If your loan is financed through a dealer, it’s wise to double-check that you’re able to refinance.
We’re Here to Help!
Switching your existing auto loan to the credit union is a great way to lower your monthly payments and create a more favorable loan. If you’re curious about how much you could save by refinancing, we’re ready to help you find out.
Please bring your current loan paperwork by any of our convenient branch locations or call 800-782-4899 to speak with a member of our lending team today.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.