Do Falling Rates Mean I Should Refinance My Car?

As interest rates fall, it's natural to wonder how they might impact you and your financial situation. For example, if you purchased a vehicle during the pandemic when prices were sky high and found yourself stuck with an uncomfortably high interest rate, you may be trying to figure out your next best move.

Maybe rising insurance rates and repair costs have made owning your car more expensive, and you're also looking into cheaper insurance premiums. Whatever your current situation, here's everything you need to know about refinancing a car. The more you know, the better equipped you are to make a decision that will benefit you.

Is it possible to refinance a vehicle?

Like any other consumer loan, a vehicle can be refinanced. The lender's risk is low because your car is collateral for the loan. A lender knows that if you fail to make payments, it can repossess your vehicle, sell it, and recoup its losses.

However, finding a lender willing to do so may be difficult if you owe more on your car than it's worth. For example, if the Kelley Blue Book value of your vehicle is $30,000 but you owe $35,000, a lender may be concerned about what would happen if you missed payments and the car needed to be repossessed and sold. The question is whether the lender could sell the vehicle for enough money to pay off the loan.

One way to solve this problem may be to pay the difference between the car's value and the amount you owe. In this case, you'd need to pay $5,000 to make up the difference.

So yes, you can refinance a vehicle. The trick is determining whether doing so will benefit your bottom line, leaving you with more money.

When refinancing makes sense

Like taking out any other loan, there are costs associated with refinancing a vehicle. Despite the cost, refinancing can be a smart move if:

• You can land a lower interest rate than you're currently paying.
• You want to shorten (or lengthen) your repayment terms.
• You're having trouble making your monthly car payment, and refinancing gives you a lower payment.
• Your credit score has improved since you took out the original car loan, and you can now qualify for a better rate.

When refinancing doesn't make sense

While refinancing may sound attractive, it's not right in every situation. For example, you may want to think twice about refinancing if:

• You owe more on the vehicle than it's worth and don't have the funds to make up the difference.
• You plan on trading or selling your car soon.
• Due to wear and tear, you can't count on your vehicle to last much longer.
• Your credit score has taken a hit since you got the original loan.

Fees associated with refinancing a vehicle

Where you get a new loan significantly affects the cost of refinancing. While some lenders won't charge much to refinance, others nickel and dime borrowers, making the loan far more expensive than it needs to be. Here are some of the fees that lenders sometimes charge:

• Application fee: Some lenders offer a free rate quote, but then charge you a fee for applying.
• Registration fee: Depending on your state, you may be required to reregister your vehicle if you switch lenders. You can find out by checking with your state's Department of Motor Vehicles.
• Title transfer fee: Some states also require a title transfer fee when refinancing the loan. This fee makes a little more sense because if you change lenders, the old lender must transfer the title to the new lender.
• Termination fee: Whether you must pay a termination fee for paying your old loan off early depends entirely on your lender. Some charge an early payoff penalty, while others don't.

Before deciding whether refinancing your vehicle is a money-saving idea, determine which fees will apply.

Finding the right lender

If you have a home bank or credit union, your best bet may be to begin there. After all, your bank already has a professional relationship with you and may be more flexible than another lender.

The same advice that applies to applying for any other kind of loan applies here: Rate shopping is critical. Not only do interest rates vary by lender, but so do fees. You won't know what's out there until you've spoken with at least three or more lenders to learn what's available.

And if you don't find a loan that makes you happy right now, don't be discouraged. According to Fitch Ratings, the Federal Reserve is expected to cut interest rates two more times in 2024 and four times in 2025. By this time next year, rates may be considerably lower, and you'll be glad you waited to snag the lowest rate possible.

In the meantime

If you're looking to save money, consider shopping for another auto insurance policy. No two insurance companies are exactly alike, and you're likely to be surprised by how much their rates vary. Whether you have a teen driver in the household or need coverage for a high-risk driver, the competition among insurers can work in your favor.