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.