When to Refinance Your Car

If you are considering refinancing your car, you should only do so for the following three reasons:

1) You can get a better interest rate. If you can get a rate at least 1 percent better (and preferably 3 or 4 percent better), go ahead and refinance your auto loan. You won't get much benefit from anything smaller than 1 percent. Mentally it may seem like 5.99% is better than 6.25%, but the reality is that they're so close it's not even worth your time.

2) Not being able to make payments on your car loan is another reason you should refinance. If you can't afford the payments and may default on your loan, definitely refinance. If there is a possibility that your car will be repossessed in the next couple months, refinance as soon as you can if this will prevent repossession.

3) Not being able to afford payments on your home loan is a definite reason why you should refinance your auto loan. This will only work if refinancing your auto loan will lower your car payments. Then you can use the money you save on your car loan to pay your mortgage.

Do NOT refinance your car in order to get money to pay other bills. You will not be able to get any money from the equity in your car because cars do not have any equity. A car is a depreciating asset, which means that it is worth less tomorrow than it is today.

Although some banks may offer "car equity loans," don't fall for it. Your car may be worth more than what you owe, but this never lasts very long. It would be a mistake to borrow against this equity. You will add more payments to your current auto loan. Consider the future. Making an additional two years worth of payments on your car could not be worth the $100 you would get today from this kind of loan.

If you do choose to refinance for extra cash now, you will regret doing so in two or three years when you are making those extra couple years of payments. The only reason you should refinance is if you are at risk of defaulting on a major asset.

If refinancing is necessary, be sure to keep in mind:

Walk away if a bank is going to charge you large fees such as "loan origination fees" or "refinancing fees." Only pay small fees like $20 for a new title or lien. The bank should not charge you for your business.

If you are going to refinance, do not add any more time to your car loan unless you are really desperate to lower your payments. For example, let's say that you took out a five year loan when you bought your car three years ago, so you only have two years left of payments. When you refinance, you shouldn't take out another five-year loan because now you will be making payments for another five years when you would have been done in two. All refinancing has accomplished is extending how much time you will be making payments on your car. When you refinance, get a loan that will end at the same time your original loan would have ended.

Be sure to consult with your credit union when refinancing. Their rates are excellent, and they really want to help you. Credit unions are more willing to work with a customer than a regular bank is, particularly when there is risk of defaulting.