Posted on April 12, 2020
You may be wondering when to refinance an auto loan, or whether refinancing auto loan terms makes sense right now when things seem so uncertain. At the same time, you're probably seeing ads for refinancing everywhere. Is it a good idea? Is this the right time? Where is the best place to refinance? Here at Eastside Kia in Calgary, we're happy to help you find your way through the new financing landscape. First, let's take a look at the benefits.
Interest rates may have dropped since you originally financed your car loan. Rates rise and fall naturally, and in the spring of 2020 there's downward pressure on interest rates in general due to the economic impact of the Covid-19 virus. Plus, your own financial situation may have improved or your credit rating may have risen since you took out an auto loan. Refinancing to a lower interest rate could save you thousands of dollars in interest over the life of your loan.
Consider the example of a $25,000 loan that was originally financed at 7% for five years. If you refinance after one year at 5%, to be paid off over the same four remaining years as the original loan, you'll save over $2,000 in interest charges. Plus, you'll also have equity in your vehicle sooner, meaning that it's worth more than you owe. At that point you'll be in a better position to trade for a newer vehicle if you wish.
Right now many people are interested in lowering their monthly expenses due to the current uncertainty. Refinancing an auto loan can be a terrific way to do this. Let's say your current loan payments are $500 per month, of which $100 per month consists of interest. Refinancing to a lower rate might get you down to $50 per month of interest, reducing your overall monthly payment to $450 per month. Or if you're comfortable with your current monthly payment, you can refinance for a shorter term since you'll owe less interest, and you can have your auto loan paid off sooner.
If your car is currently worth more than you still owe, then you have equity in it. This essentially means you can borrow against that equity by refinancing. You'll refinance for a larger amount than you currently owe, and the extra amount is returned to you as cash. This can be a great way to pay off unexpected expenses or credit card bills, but be aware that the new loan terms could increase the total amount you'll pay for your car in the long term, even if the interest rate or monthly payments are lower.
Life circumstances change. Maybe you needed a co-borrower because your credit wasn't so great at the time you bought your car, but since then your credit has improved. Maybe your co-borrower was a relationship partner, and the car loan has outlived the relationship. Whatever the circumstances, refinancing can be an excellent opportunity to remove a co-borrower and take on the full loan under your own name.
Well, we've covered the benefits of refinancing, but there are some circumstances under which you might not want to refinance right now. For one thing, you generally need a history of on-time payments on your existing loan stretching back from six to twelve months, depending on the lender. So if you've been struggling and made a late payment or two, you'll probably want to hold off and focus on improving your payment history.
Likewise, if your credit rating has gone down, this wouldn't be a good time to refinance even if you could get a lower monthly payment, because you would mostly likely be paying over a longer term at a higher interest rate and that can cost you many thousands of dollars in the long run.
Watch out for fees! Depending on the lender, loan origination fees for refinancing may be so high that they will eat up most or all of your savings from a lower interest rate, especially if the interest rate is only reduced by a small amount. Likewise, make sure your existing loan doesn't have pre-payment fees if you pay it off during a refinance, which might also reduce the amount you save.
Finally, if you're close to paying off your existing loan--say, twelve months or less--you'd probably be better off to finish paying off that loan and then owning the car free and clear with no monthly payments at all. Imagine how liberating that will feel!
The first place to check is the bank where you do your checking. They know you're a good customer and they just might have a lower interest rate available. Other banks in your area might have low rates, too, so don't be afraid to shop around. Finally, the Internet is an excellent resource for comparison-shopping of auto refinancing rates.
As we mentioned earlier, the Covid-19 virus has thrown a wrench into the financial sector just as it has disrupted most other parts of the economy in 2020. However, that doesn't mean refinancing is impossible. For instance, if your household's financial situation has changed--say, your partner has been laid off and now your household has only one income--consider contacting the bank that originated your auto loan. Many banks are offering assistance to customers affected by the economic shutdown, and banks would generally prefer to refinance rather than repossess.
Furthermore, the Bank of Canada has lowered interest rates and provided extra liquidity to banks throughout Canada to help them to get through these times, and your financing bank may have the resources it needs to help you get more manageable payment terms.
If you financed your vehicle through an automaker's financing arm, you may be able to refinance through them. According to Business Insider, "Automakers have responded by rolling out flexible payment terms for stressed customers."