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Blog takeover! The UMe Emu dishes on Auto Refinancing

Hello! Hola! Guten Tag! Xin Chao!

It’s me, the UMe Emu and no, you haven’t wandered into It’s a Small World by mistake.

As UMe’s brand ambassador and financial guide, I want to talk to everyone about refinancing a car. Little-known fact: Emus are excellent drivers. In fact, our driving skills are only out-matched by our financial wisdom. Which is why I’m the perfect candidate to walk you through the vehicle refinancing process.

And that brings us to the question that probably brought you here: “Should I refinance my car?”

Let’s find out…

Car Refinancing: Please Explain

Refinancing is the process of obtaining a new car loan that pays off an existing loan.

When you refinance, you get new loan terms, a potential new lender, and in some cases, a significant amount of savings.

And pro tip: you may hear your lender or dealer say “Refi” which, in case you haven’t already deduced, is just bank shorthand for “refinance.” (Personally, I’m not a big fan of bank speak, but I feel like I should prepare you for it.)

When Should I Refinance My Car?

You know that butterflies-in-your-stomach feeling you had as a kid on your birthday? That sweet anticipation of receiving gifts upon gifts??

That’s how your money might feel when you refinance your car.

Below are all the potential reasons why a refinance can be a good idea (Fine print: keep in mind that terms, conditions, and closing costs play a role in the outcome of any loan.)

Your wallet is sad
If you purchased a car with a high interest rate, refinancing with a lower interest rate can reduce how much you spend on the vehicle.

Here’s an example. Let’s say you have $13,000 left on your vehicle loan and 5 years to repay it. Your current interest rate is 8.5 percent. But a lender can offer you a new loan at 4.5 percent.

In this situation, you could see a difference of over $1,454 in the amount of interest you will pay on the loan. That’s money in your pocket, or if you’re an Emu, your feathers.

Your monthly payment is cramping your (financial) style
If you have a high monthly payment and can find a lower interest rate, your monthly payment could drop as well. In the above example, your current monthly payment could be $267. But, if you refinance, you could lower your monthly payment to $242 instead.

Your credit score got a makeover
Here’s a tasty morsel of financial trivia: you can raise your credit score by simply making monthly payments on time. So, if your credit was so-so when you took out a loan to buy a car, and you’ve paid on time for a while, your score may have spiked.

Now, you may be able to use your shiny new credit score to qualify for a lower interest rate on your car loan.

You’re over your lender
If your lender is more interested in charging high fees than answering your questions or just saying ‘How ya doing today?’, it might be time to switch. (Car dealers are typically known for being bottom-line obsessed.)

And not to pile on dealers, but while many are good companies, some are not motivated to connect you with the best lenders.

Here’s an insider tip from my years in the personal finance industry: some dealers have a list of preferred lenders, which means they earn more in commission when they choose from their list.

In other words, you may find a lower interest rate somewhere else. I may even know a pretty great credit union I can refer you to…

You want to defeat your debt
Credit card debt got you down? (That’s a trick question. The answer, of course, is “duh.”)

A vehicle refinance may be able to help with that. Some lenders allow you to refinance your car to include unsecured debt (e.g., credit cards). If you don’t owe much on your loan and have some equity built into it, this could be the debt buster you’ve dreamt about.

Your car will be used as collateral, but let’s be honest: an interest rate of 5 percent is often better than paying 20 or more percent in credit cards. Plus, over time, this could also boost your credit score and help you pay down debt faster.

When Should You Not Refinance Your Car?

As your trusted financial guide, I should tell you that refinancing your car isn’t always the best option. Here are some scenarios when you should PUT THE BREAKS on a refinance.

(Get it?... Anyone?... Is this thing on?).

The interest rate isn’t all that… interesting
One thing people sometimes overlook with loans is closing costs. So while it may initially seem like your new loan will be cheaper, don’t forget to add up all the fees.

The sweet spot for an interest rate on a vehicle refinance loan is greater than one percent. If it’s less than that, the savings may not be worth it. Indeed, you should PARK your loan application (okay okay, I’ll stick to my day job).

You want to lower the monthly payment by extending the loan
Getting a lower monthly payment with a new loan is worth it—if you truly need it. But if you just need to make room in your budget to explore your passion for vintage doilies, a refinance is not necessarily a good thing. You’ll be paying more over time in interest.

You have ants in your pants
You may get impatient and feel tempted to pay off your loan sooner with a refinance. But don’t forget about those pesky closing costs. They’ll add money to your total, slowing your ability to pay.

If you can swing it, double your monthly payment or make a larger one-time payment instead.

So what does all this mean for me?

How do you know if you should refinance your car loan? The first step is to read this blog post, which you’ve already done, so congrats on being productive!

Step two is to start a conversation with a lender. Actually, you may want to talk to more than one so you can compare offers. Here are some things you’ll want to know:
  • Interest rate
  • Loan term
  • The amount you are refinancing
  • Closing costs
  • Monthly payment

Finally, try not be intimidated. Lenders want your business, and the good ones will be happy to answer all of your questions.

And remember, you don’t have to be an emu to make smart decisions about a car loan refinance… but it doesn’t hurt ☺
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