Before you refinance the car
Spring is when people think about cars, so this is the season we get asked about refinancing. It is usually a good idea. Here is how to tell whether it is a good idea for you, including the cases where the answer is no.
The case for
If you financed at a dealership, you agreed to terms at the end of a long day, while negotiating several things at once, using whichever lender the dealer's system surfaced. That is not a comparison. It is a default.
A year of on-time payments later, two things have changed: your payment history is longer, and you are shopping calmly. Both work in your favour.
The four numbers to have in front of you
- Your payoff amount — not your balance. Ring the lender and ask; they are different numbers.
- Your current rate, from the agreement rather than memory.
- Months remaining.
- Whether there is a prepayment penalty. Most car loans have none. Some do, and it changes everything.
With those four, anyone competent can tell you in five minutes whether refinancing helps.
The trap
A lower monthly payment is not the same as a cheaper loan. Stretch a loan from three years to five and the monthly figure falls pleasantly while the total you pay rises. Lenders quote the monthly number because it is the one that feels good.
Ask for total cost over the life of the loan, both ways. If a lender will not put that in front of you, you have learned something useful about that lender.
When not to bother
If you have under a year left, the saving is small and the paperwork is not. If you are about to apply for a mortgage, leave your credit file alone for now. And if you are underwater — owing more than the car is worth — refinancing does not fix that, and anyone who says otherwise is selling you a longer loan.