Are you considering refinancing your car loan with a credit union instead of sticking with your current finance company or bank? Credit unions offer many benefits and perks to their members, and if you're shopping rates for an auto loan it may make sense to check out their options. However before you make a decision, do your homework on the pros and cons of using a credit union. Every situation is different, and in some cases refinancing an auto loan through one of these lenders may not make sense.
Pro: Lower Interest Rate
One important benefit to auto loan refinancing through credit unions instead of banks is the lower rates. Credit unions are organized differently than banks, with ownership in the hands of credit union members instead of in the hands of shareholders. This means members enjoy lending earnings in the forms of lower borrowing rates and higher investment rates. For example, in December, 2014, the average four-year car used car loan from a credit bureau was 2.83 percent, compared to 5.3 percent for car loans from banks, according to the National Credit Union Administration.
Con: You May Have to Pay a Penalty to Get Out of Your Current Auto Loan
Some loans come with what is known as a prepayment penalty. This is an amount payable to the lender by the borrower if the borrower wants to pay off the loan earlier than agreed to. The idea behind a prepayment penalty is to compensate the lender for some of the interest they won't earn because the loan has been paid off early.
While the low auto refinance rates offered by a credit union may tempt you, review the calculations of your total costs to refinance your car loan carefully if the existing loan has a prepayment penalty clause. If your penalty is high, it may wipe out any savings you think you'd get with a new, lower rate.
Pro: Flexibility in Auto Loan Repayment
Excellent customer service and flexibility with their lending products, such as auto financing, make credit unions popular with borrowers. Those that have been designation a "Low Income Credit Union" (LICU) even have access to additional funding sources that may keep loan rates low - even for those borrowers with lower incomes who may pay higher rates through traditional lenders. Other flexible policies may make it possible to qualify to refinance up to 100 percent of the value of your vehicle. Or maybe the credit union vehicle refinance policy includes no prepayment penalties - a great feature if you expect to be in a position to pay off your loan before the term is up. If flexibility in your finances is important, refinancing your vehicle through a credit union may be a wise choice.
Con: Your Loan May Outlast Your Car
How old is your vehicle? One of the cons of refinancing an auto loan through a credit union is that you may be tempted to go with a longer term loan because of the super low rates. Remember, however, that a new loan to pay out your old one means you'll also be starting with new payments -all over again. So if you choose a five year auto loan to refinance your eight year old vehicle, you won't pay off the loan until the vehicle is thirteen years old - if it's still road-worthy, that is.
To compare auto loans in minutes, use LendingTree's free car loan comparison tool today. Don't forget to compare these options against your current loan to see if it's worth refinancing your vehicle with a credit union loan.