Refinancing Your Car Loan: How Much Can You Save?




If you're paying 6% or more on your auto loan, consider refinancing it. You could put hundreds of extra dollars back in your pocket. Here are some situations that may make an auto loan refinance advantageous:

1. Interest rates are lower than when you bought your car, or you got your auto loan from a dealer without shopping for a rate. If interest rates have dropped since the day you purchased your car, you may be able to save by refinancing. Similarly, if you took the first loan offered (and it wasn't one of those 1% dealer-subsidized interest rates), you might be able to do better. Dealer-sourced vehicle loans often come with higher rates than you could get elsewhere because the dealers aren't arranging financing from the goodness of their hearts -- the extra money is a profit source, just like extended warranties or destination charges.

Keep in mind though that you are no longer financing a new car -- you are refinancing a used car, and those rates are generally higher than new car loans. The good thing is that, unlike home mortgages, auto refinances cost almost nothing to originate, so most of your interest savings goes straight to your bottom line.



2. Your credit score has improved since you bought your car. If you had no credit history when you financed your vehicle, or your report had a few marks in it, you may qualify for a lower interest rate today if your score has improved. Folks with minimal credit histories (an especially common problem for younger buyers) can be charged as much as 18% on their first car loans. Yet, if you make your payments on time for a year, you may qualify for much better offers. Check your credit report for free at www.AnnualCreditReport.com. You can purchase your credit scores for a nominal fee as well.

3. You're short on cash. If you need to reduce your payments, refinancing could be a viable solution. By stretching the remaining balance of your loan over a new, longer term, you can drop your payment significantly. For example, if you have a 5-year $25,000 car loan at 6% and have paid on it for 3 years, you could drop your monthly payment from $483.32 to $221.11 by refinancing the remaining $10,905 balance with a new 5-year loan -- even if you increased the interest rate to 8%! Although you will be improving your "cash flow," just understand that in the long run you will pay more in total interest with this strategy.

4. Your car lease is expiring and you want to purchase the vehicle. When the term of your lease is up, you usually have the option to buy the car. The dealer will probably offer you a financing package; take this as a starting point and shop a bit to see if you can improve on the terms.

Refinancing Auto Loans is Far Simpler than Refinancing Mortgages

Refinancing a car is not hard. It's not like refinancing your mortgage, which can include armloads of paperwork, lender fees and title insurance. Refinancing your vehicle loan is usually quick, cheap and easy once you have shopped for the best available interest rate and selected a lender -- you don't even need an appraisal.

A Look at Possible Savings

How much can you expect to save? If you refinance a 5-year, $25,000 auto loan carrying a 7.75% interest rate at the end of the first year, over the remaining 4 years, you'd save:

• $1,373 with a 4.75% loan, or $28.61 a month

• $921 with a 5.75% loan, or $19.19 a month

• $463 with a 6.75% loan, or $9.65 a month

Refinancing doesn't work for everyone. If your car is worth less than the loan balance, it is unlikely that you'll be able to find a lender willing to refinance your loan. You can determine the current value of the vehicle through the Kelley Blue Book, Edmunds, or Auto Trader.

Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.

5  ways to boost your credit score before applying for a mortgage


In today's tight economy, more than 25 percent of consumers -- an estimated 43.4 million people -- have a credit score of 599 or below, according to recent numbers released by FICO. "And while the FHA program will write mortgages with the same great interest rates all the way down to a credit score of 580, other low-rate offers will generally require a score of 720 or higher," said Keith Gumbinger, Vice President of HSH.com.
You'll be offered better mortgage rates with a higher credit score, says Gumbinger, and that translates into savings. Get offered a 6 percent rate instead of 5 percent on a $200,000, 30-year mortgage, and you'll wind up paying about $125 more each month.



Here's what you can do to raise your credit scores and get on the path to home ownership.

Know how your score works

Your overall credit score is made up of several factors, and each is weighted differently. Since different credit behaviors can have different effects on your score, it's important to know how they works.

Here's the breakdown of which factors affect your credit score:

•Payment history (35 percent)

•Amounts owed (30 percent)

•Length of credit history (15 percent)

•New credit (10 percent)

•Types of credit used (10 percent)

Get credit savvy



Think about how your financial behavior affects your credit score. Do you carry a balance on your credit cards? If so, that hurts your score in terms of amounts owed. If you open too many new lines of credit, mortgage lenders will see you as desperate. Making late payments causes creditors to think you're insolvent. These are all things that will drop your credit score.

Check your status

"You'll want to review your credit reports six months or more before a large credit event like applying for a mortgage," says Gumbinger. It can take quite some time to clear up any errors or solve legitimate disputes, and you want those things off your report when you fill out mortgage applications.

Even if you're not in the market for a mortgage, you'll still want to review your credit reports at least once each year. You're entitled to one free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) each year. Stagger receiving the reports, and you'll have a credit update once every four months. You can access your free reports at www.annualcreditreport.com.

Pay on time

"Be extra careful to make each [of] your minimum payments on time each month," says Barry Paperno, product support manager for FICO, inventor of the FICO score. "If you're late making payments now, bring them current immediately and keep them current." Your payment history makes up the largest part of your credit score (35 percent), and it takes longer to raise your score after late payments than it does for some other issues.

Pay down debt

Since the FICO formula looks at your credit card limits and balances, both individually and in total, shifting balances around won't make your bottom line look any better. Instead, you'll want to pay down balances while continuing to use the cards, says Paperno. Ideally, you'll want to aim for a utilization percentage, both individually and in total, of under 10 percent. That means you're using less than 10 percent of available credit on any one of your cards.

Don't close accounts

Length of credit history is another important part of your credit score, so closing old accounts could actually hurt you. That's because potential mortgage lenders want to know you've been responsible with credit for a good long time. Keep older accounts active by making small charges on each one at least every few months and then paying those charges off right away, advises Paperno. "Using your cards regularly keeps them active, which ensures that your credit limits on these cards continue to be open and included in your credit utilization. Contrary to popular belief, you won't be penalized for having lots of available credit.

About the author:

Alexandra Kay is a freelance writer and researcher who has been contributing to magazines for ten years. Her previous experience includes three years as staff researcher for World News Tonight Saturday/Sunday. Alex holds a master's degree in print journalism and a second master's in teaching English.