Top 5 Common Myths About Refinancing a Car Loan
Blog Highlights:
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Car loan refinancing myths can prevent people from getting the savings they need.
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Refinancing a car loan at any point in the loan can help people save money and achieve goals.
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You don’t need a perfect credit score to refinance an auto loan.
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Credit unions work with members of all financial statuses in the community to expand borrowing opportunities.
Misconceptions about refinancing a car loan sometimes impede people from making an informed financial decision. What happens too often is that one person’s poor experience becomes exaggerated in the rumor mill. The next thing you know, misinformation takes on a life of its own. Truth be told, situations exist when refinancing a car loan may be in your best interest. By dispelling common myths, you will be armed with the facts needed to implement strategic changes.
Ways to Save by Refinancing a Car Loan
It’s important to keep in mind that refinancing your auto loan should be part of a broader plan to manage personal finances. By weighing the status of an existing auto loan against prevailing rates, debt-to-income ratio, credit score, and other factors, refinancing could deliver the following benefits.
- Lower Your Monthly Payments
- Pay Off the Car Loan Sooner
- Secure a Lower Interest Rate
The decision to apply for a new car loan to replace an existing loan calls for research. You will need to do the math on interest rates, repayment terms and account for any loan application processing fees. Those who rush into refinancing can end up owing more on the vehicle than its value. Being underwater creates a financial impediment when it comes time to trade the car, truck, or SUV in for another model. But, with a fact-based plan in place that is supported by hard data, you could benefit from refinancing your car loan.
Common Myths About Refinancing a Car Loan
We live in a world where myths and misinformation lead us to wrong conclusions. You may have heard some of the following narratives about refinancing an auto loan that may have prevented you from looking to save by refinancing. While it isn’t a great fit for every financial situation, refinancing certainly has its benefits. Explore these common car loan refinancing myths and unravel the facts so that you ca make the best decision for your financial situation.
Myth 1: You Can Only Refinance Your Car Loan Once
Like so many other myths, this one may have sprouted from a sliver of truth. Lenders establish certain guidelines that result in loan application denials. For instance, many require vehicles to be no less than 10 years old, with some exceptions. In other cases, refinancing may not be an option if the transaction would result in owing more on the vehicle than it’s worth.
While each lender is different, besides these two commonalities, most people are able to refinance more than once. Lenders generally don’t set a limit on refinancing for qualified borrowers.
Myth 2: Refinancing a Car Loan Costs Too Much in Fees
While some lenders do charge fees, they typically don’t outweigh the potential cost savings that would come from refinancing a car loan. How many fees and how much they add to the loan amount largely depends on the organization. Some corporate banks charge excessive fees to help pay dividends to shareholders, while credit unions, if they charge fees, only require the necessary processing fees maintain a business.
Myth 3: Only People with Excellent Credit Can Refinance an Auto Loan
Less than one-quarter of Americans have a FICO score of 800 or higher. If this myth were true, more than 75 percent of the population would not be in a position to refinance. Lending industry insiders can attest to the fact that far more get approved.
While some corporations will only approve automobile loans for those with excellent or very good FICO scores, credit unions are meant to serve the underserved. With a goal to increase lending opportunities for singles, couples, and working families, credit unions are inclined to look at other relevant factors, not just credit scores. Refinancing a car loan is definitely possible with a less than perfect credit score.
Review this credit score breakdown to see which category you fall in:
- Excellent: 800–850
- Very good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
Myth 4: Refinancing Always Increases Your Loan Term
Nothing could be further from the truth than saying refinancing a car loan requires you to extend the repayment process. Borrowers enjoy a variety of options that include expanding the number of installments, keeping the same amount, or reducing monthly payments. One of the reasons some choose longer repayment terms involves lowering monthly payments.
If you can lower the interest rate, keeping the same number of loan payments saves you money over the life of the loan. Shortening the terms, coupled with a lower rate, allows some borrowers to maintain the status quo and get the loan paid in full earlier. The facts are that people make decisions based on their income and financial goals. When it comes to repayment terms and monthly loan payments, you have choices.
Myth 5: Refinancing Isn’t Worth It if You’re Near the End of Your Loan
The decision to refinance a car loan, maintain your existing repayment plan, or pay it off entirely should be driven by responsible planning. Everyone comes to the borrowing equation with a unique perspective, goals, resources, and needs. Let’s consider a hypothetical scenario that make refinancing late in a loan worthwhile.
Losing a job or suffering a setback may prompt someone to look for ways to lower monthly obligations. Extending the terms of an auto loan could significantly reduce the payment, providing the budgetary wiggle room someone needs until they get back on track. While having the last remaining loan payments in sight, an emergency might make refinancing a car loan near the end well worth it.
Allegiance Can Help You Refinance Your Car Loan
Allegiance is committed to helping our members refinance car loans when it benefits their unique financial situation. Our car loans and refinancing options feature competitive rates and flexible terms helping you to create the custom loan payment and repayment plan for your loan. If you are considering refinancing a car loan, and you are not sure if refinancing is the right choice for you, contact Allegiance today. We’ll help you find the perfect loan and payment for your needs!