May 1, 2023Love Your Car but Not the Payments?

When you purchased your vehicle, you probably didn’t buy it on a whim. Instead, you researched vehicles to find the one that best matched your lifestyle. Perhaps you needed an SUV for your growing family. Or you wanted a car with excellent gas mileage for commuting. Regardless, your car reflects you and your personality! 

But what about the payments? Buying a new car is exciting, and it’s easy to get distracted. Then, months later, you realize the payments might be more than you prefer. Luckily, lowering your auto loan payment is pretty easy through a process called refinancing.  

What Is Refinancing? 

Don’t let the term “refinancing” scare you into believing the process is complex, expensive, or time-consuming. It simply means replacing your current loan with a new one to get more favorable terms, such as lower payments.  

Two Ways to Refinance Your Loan:

• Existing Lender:  Some lenders will allow you to refinance your current auto loan, depending on the reason and terms. However, your options might be limited if you’re simply trying to lower your payments.  

• New Lender: Transferring your loan to a new lender is the more common approach to refinancing. For example, if you originally financed your car with the dealership, you could switch your loan to PEFCU. This situation is ideal if you’re trying to obtain a loan with terms that better fit your budget. 

Strategies to Lower Your Payments: 

Lowering your auto loan payments by refinancing generally happens in one of three ways:  

• Getting a lower interest rate. 
• Extending the term of the loan.  
• A combination of both 1 & 2. 

To illustrate how each option will affect your loan payments, review the following scenarios. 

The examples below will use the following loan information: 

Loan Details:	Dollar Amount:
Loan Amount	$30,000
Length of Loan	60 Months (5 Years)
Interest Rate	6% APR
Monthly Payment	$579.98
Total Interest Paid	$4,799.04
Loan Balance After 12 Months (1 Year)	$24,695.90

1. Getting a Lower Interest Rate.

Qualifying for a lower interest rate usually happens in two ways: 

1. Interest rates have declined since you originally financed your loan. 
2. Your credit score has improved since you purchased your car. 

Using the figures above, assume it’s been 12 months since you financed your car. You now qualify for a lower interest rate of 4% APR. Keeping the rest of the loan the same, lowering your interest rate to 4% APR will yield the following:

• New Monthly Payment: $557.61 (Savings of $22.37 monthly) 
• Total Interest Paid: $3,725.09 (Savings of $1,073.95) 

Result: Lowering the interest rate will drop your monthly payment slightly. But the biggest savings in this method comes from the total amount of interest paid over the life of your loan. In this example, you would save a whopping $1,073.95! 

 

2. Extending the Length of the Loan.

Using the figures above, assume it’s been 12 months since you financed your car. You decide to extend your loan term from 48 months to 60 months. Keeping the rest of the loan the same, extending the loan term by 12 months will yield the following: 

• New Monthly Payment: $477.44 (Savings of $102.54 monthly) 
• Total Interest Paid: $5,606.27 (Increase of $807.23) 

Result: Extending the loan term by 12 months causes a significant drop in your monthly payment ($102.54). However, it also causes you to pay more interest over the life of your loan (an extra $807.23). This could be an ideal option if you’re facing a financial setback and need to free up extra money in the short term. 

 

3. Combination Refinance.

If your goal is overall savings, lowering your interest rate and extending the loan term will deliver optimal results. 

Using the figures above, assume it’s been 12 months since you financed your car. You now qualify for a lower interest rate of 4% APR and choose to extend the loan term by 12 months. This scenario will yield the following: 

• New Monthly Payment: $454.81 (Savings of $125.17 monthly) 
• Total Interest Paid: $4,248.57 (Savings of $550.47) 

Result: The combination of lowering your interest rate and extending the term yields the best results. Your monthly payment significantly drops to $454.81 (a savings of $125.17 monthly). Your total interest paid also declines by $550.47. It’s a win-win! 

 

How Refinancing Works: 

Refinancing your auto loan may sound tedious, but the process is simple and quick.  

1. Contact us: If you’re unsure if refinancing will benefit you, contact us before you apply. We’ll run the numbers with you, and your credit score won’t be affected if you decide not to move forward. 
2. Apply: Bring your current loan paperwork to any branch location or apply online 24/7 or via mobile banking. Our team will review your application and work to get you approved. Note: Approval is based on creditworthiness.
3. Payoff: Once approved, our team will pay off your existing loan with your current lender. 
4. New Loan: The credit union will create a new loan reflecting the more favorable terms and lower monthly payments.
5. Love Your Payments: Now…you’ll love your car AND the monthly payments! 

Things to Consider: 

While refinancing replaces your existing loan with a more favorable one, there are some things to consider. First, extending the loan term too far could result in you owing more than the car is worth. Luckily, our team will inform you if this is likely to occur and advise against it.  

Second, some dealerships will lock you into your loan – meaning you can’t refinance for a set period. While it’s no longer too common, this usually happens when accepting certain dealer incentives. For example, you might get $1,200 off MSRP, but you cannot refinance for a certain number of months. If your loan is financed through a dealer, it’s wise to double-check that you’re able to refinance. 

 

We’re Here to Help! 

Switching your existing auto loan to PEFCU is a great way to lower your monthly payments and create a more favorable loan. If you’re curious about how much you could save by refinancing, we’re ready to help you find out. 

Please bring your current loan paperwork to any of our branch locations or call 800-226-6673 to speak with a member of our lending team, today. To apply for an auto refinance online, visit PEFCU.com.  

 

Each individual’s financial situation is unique and readers are encouraged to contact PEFCU when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.