Is It Better to Refinance a Car With a Credit Union?

Car refinancing involves replacing an existing auto loan with a new one. This process can potentially lead to a lower interest rate, a reduced monthly payment, or an adjustment to the loan’s repayment period. Many individuals explore refinancing to align their car loan with their current financial situation or to capitalize on improved creditworthiness. A new lender pays off the original loan, and the borrower then makes payments to the new lender under the revised terms.

What Makes Credit Unions Different for Car Loans?

Credit unions distinguish themselves from traditional banks as not-for-profit financial cooperatives. These institutions are owned by their members, not external shareholders. Surplus earnings are reinvested or returned to members as lower loan rates, higher savings rates, or reduced fees.

This member-centric approach often translates into competitive car loan rates and fewer fees compared to banks. Credit unions may offer no application fees or prepayment penalties, reducing the overall loan cost. They often provide personalized service, focusing on member well-being rather than maximizing investor profits.

To become a member, individuals need to meet specific eligibility criteria, often called a “common bond.” This bond might be based on residence, employment, school, or affiliation with organizations. Family members of existing members may also join. Joining involves opening a basic savings account with a small initial deposit, often $1 to $25.

Key Factors When Evaluating a Car Refinance Loan

Before pursuing a car refinance loan, evaluate several financial factors to determine if it aligns with your financial objectives. Understand your current auto loan’s specifics: interest rate, remaining balance, and loan term. This information provides a benchmark for new offers. Knowing your payoff amount, which may differ slightly from your remaining balance, is also important.

Your credit score impacts new loan interest rates and terms. A stronger credit score generally leads to more favorable offers. Review your credit report for accuracy before applying, as errors could negatively affect your score. While a “hard inquiry” can temporarily lower your score, the benefits of a better loan often outweigh this minor impact.

The vehicle’s market value and age also play a role in refinance approval and terms. Lenders consider the loan-to-value (LTV) ratio, comparing the loan amount to the car’s value. Some lenders restrict vehicle age or mileage, often under 10 years old or below 100,000 to 150,000 miles. If your loan balance exceeds the car’s value (being “upside down”), securing a refinance may be more challenging.

Consider the new loan term carefully, as it influences your monthly payment and total interest. A shorter term results in higher monthly payments but less total interest. A longer term can lower monthly payments, providing budget relief, but will likely increase total interest cost. Evaluate these trade-offs against your financial goals.

Refinancing can involve various fees and charges, impacting the overall cost. These may include application, title transfer, and new registration fees, depending on the lender and state. Your current loan agreement might also include prepayment penalties. Ask lenders about all potential fees upfront.

To determine if refinancing is financially beneficial, calculate your “break-even point.” Divide total refinance costs (including all fees) by your anticipated monthly savings. The result indicates how many months it will take for savings to offset costs. If you plan to keep the car and new loan longer than this period, refinancing may be a sound financial decision.

The Credit Union Car Refinance Application Process

Once you have evaluated your financial situation and decided to proceed with refinancing your car through a credit union, the application process involves several distinct steps.

Gathering Documents

The first step typically requires gathering a set of necessary documents. These commonly include:
A valid driver’s license
Proof of income such as recent pay stubs or tax returns
Details of your current loan including statements and the payoff amount
Information about your vehicle, such as its make, model, year, mileage, Vehicle Identification Number (VIN)
Proof of current auto insurance

Application Submission and Review

After compiling the required documentation, you can submit your application, which can often be done online, over the phone, or in person at a credit union branch. The application will require you to provide personal details, financial information, and specifics about the vehicle you intend to refinance. Some credit unions may offer pre-qualification with a soft credit inquiry, which allows you to see potential rates without affecting your credit score.

The credit union will then review your application, which includes performing a credit check and assessing the vehicle’s value. Lenders also evaluate your debt-to-income ratio to determine your ability to manage the new loan payments. If approved, the credit union will present you with the terms of the new loan, including the interest rate, loan term, and new monthly payment.

Loan Closing and Title Transfer

Upon accepting the loan offer, you will proceed to the loan closing, where you sign the new loan documents. The credit union will then disburse funds to pay off your original car loan. This process typically takes about two weeks to complete the documentation and an additional 30 to 60 days for the old lender to be paid off and the title updated, depending on the state’s Department of Motor Vehicles. After closing, it is important to ensure the vehicle’s title is properly transferred to reflect the new lienholder and to update your auto insurance policy with the new lender’s information.