When should I refinance my car?

If you’re renting a car, you’ve taken out a loan and you’re making monthly payments. It is possible to change the amount you are paying, or refinance the loan, and there are times when a refinance would be advantageous to you. It isn’t for everyone, so determine if you need one before you get one.

The interest rate on a car loan is determined by the prime rate, or the general market interest rate. This rate fluctuates over time, and the interest rate on your car loan will either go with the fluctuation or it will be a fixed rate. It is much safer for you to have a fixed rate on your loan because the interest will not suddenly jump up. If you have a variable rate, and it is currently going up, you should consider refinancing your loan at a fixed rate. But having a fixed rate loan does not mean you’re paying less than everyone who has a variable interest rate. If you have a fixed rate, but the prime rate has dropped below the fixed interest rate on your loan, you can consider refinancing according to the variable rate to save some money. Some car loans have an APR around 20%, so dropping the interest rate by even one percent could mean hundreds of dollars in savings.

If you have equity on the car, you could refinance to get a little cash. Having equity means you owe less than what the market value of the car is, so when you refinance, you get the amount the car is worth, and you’ll save a little money while making a new monthly payment. Conversely, if you owe more than the car’s market value, your loan has negative equity. You will not be able to refinance your loan unless you get out of the negative and back into the positive.

If you’ve owned your car for a short period of time (and the loan is amortized), you’ve probably just been paying on interest and not on the principal. You can try to get a better deal in this situation, but your net gains will be minimal since you haven’t paid off much of the original loan. If you’re going to have your car for longer than expected, you can try to stretch out the loan to make your monthly payments lower. The best way to save money by refinancing your car loan would be to look for a new rate midway through having your current loan. Just make sure you can find a lower interest rate or lower monthly payments, or there won’t really be any advantages to altering your car loan.

David Pilley

David Pilley

David Pilley is a May 2010 graduate of the University of North Carolina at Chapel Hill, with a B.A. in communication studies and a creative writing minor. He is a native of Raleigh, North Carolina.

He played clarinet for the Marching Tar Heels in 2005 and 2006. He also volunteered for STV, the student-run television station at UNC-Chapel Hill, in the spring of 2010. He shot video, wrote scripts, and acted for “Off the Cuff,” UNC’s longest running sketch comedy show. He has the rare distinction of having lived in a dorm all four years of his undergraduate college career. He was also on Franklin Street on the night of April 4, 2009. His future plans are to pursue a master’s degree in journalism and to one day work for the media as a sports journalist or broadcaster.

Being one of eight children, David realizes finance is an important topic to everyone, regardless of his/her knowledge of the subject. His interests are in personal finance, budgeting, and savings.

In his spare time, David enjoys watching sports and standup comedy, as well as doing crossword puzzles and writing in the first person. He also thoroughly enjoys trivia and, one day, hopes to participate on the game show Jeopardy!, where he will try to break Ken Jennings’ 74-game win streak.
David Pilley

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