Many people overlook the financial potential of refinancing their loans, but refinancing can be a smart way to lower costs, extract equity, and improve your finances.
Debt is part of modern life — Americans borrow to buy cars (Americans owe more than $1.2 trillion on vehicle loans), homes (total mortgage debt exceeds $10.5 trillion), and everyday items like phones and retail goods. But many consumers never investigate one of the most powerful debt tools at their disposal: refinancing.
New loan
Refinancing can bring a lot of potential benefits — most obviously, significant savings. Other benefits abound: “Sometimes people refinance to extend the term of their loan so that their payment can be a little bit lower,” notes Annette Kalinowski, a senior manager in automotive product experience at Pentagon Federal Credit Union (PenFed). “Or they take some cash out to pay down unsecured debt so that they have a lower interest rate overall, which can also improve their credit score.”
And home mortgages aren’t the only loans that can be refinanced — banks and credit unions will refinance student loans, business loans, and even car loans. In fact, for many people their auto loan represents a fast, easy way to improve their finances.
“The process for refinancing a vehicle is much simpler than refinancing a mortgage,” explains Kalinowski. “You can go online, fill out an application, and get a decision usually the same day, sometimes immediately. But know exactly what that product covers. Ask questions about what happens if you are upside down on the vehicle, if you have an accident, if you’re protected if the vehicle has mechanical issues.”
Watch the rates
The key to choosing the right time to refinance is doing your homework. “It’s really important to watch your credit report and know what your credit position is,” Kalinowski advises. “Utilize loan calculators online. You have to make sure that you’re actually going to save money. Don’t look at just the interest rate.” If you’re looking to refinance a car loan, she warns that you shouldn’t pay any sort of application fee because many lenders and credit unions like PenFed have no processing fees whatsoever on car loan refinancing.
Consider credit unions
Finally, Kalinowski suggests expanding your search to include credit unions like PenFed. “A lot of people are fearful of big banks, and don’t know that credit unions provide a lot of what big banks do,” she says. “But wherever you go for a refinance loan, remember: Don’t shop on just the loan rate, or just on the monthly payment. Look at the entire picture.”