Auto Loan Refinancing

By Jack R. Nerad

Are you afraid you missed the boat on refinancing your auto loan, because interest rates are now on the rise?  Well, it's not too late to enjoy some savings, especially if you have a long (four-, five- or six-year) loan from an earlier, high-interest rate time.  But the clock is ticking, and the Fed could call for a boost in interest rates at any time.

Last year, we revealed the savings the average consumer could realize from a well-conceived automotive re-fi as interest rates edged lower.  Now, with the signals clearly indicating that higher interest rates are ahead, it might be your last chance to hop on this bandwagon.  Many consumers are still surprised to learn that they might find some money waiting for them if they take a few minutes to consider refinancing their vehicle loan.   

"Many people finance their auto loans directly through their dealer, which is convenient," says Brian Regan, chief consumer officer of LendingTree, Inc. an on-line lending exchange. "What consumers don't realize is that the dealer doesn't always give them the lowest rate they qualify for, and that could cost them more money over the life of their loan."

Consumers who financed a couple of years ago when lending interest rates were higher might also find that today's lower rates allow them to shorten their loan term with the same monthly payment.  Or they can lower their monthly payments by keeping the term the same.  Either way, they'll be saving money.

One of the reasons consumers might shy away from refinancing their vehicles is the fear of being fee'ed to death, because those who have been through a home mortgage re-fi know the endless stream of application fees, registration fees and closing costs that accompany the transaction. But if you find the right lender, refinancing your vehicle can often be accomplished with minimal fees and out-of-pocket costs. For example, in many states refinance applicants pay only a $15-$25 fee to transfer the lien.

There is one key factor to make certain of, however. Car owners contemplating a re-fi need to make certain that their existing loan has no prepayment penalties. Vehicle refinancing gives consumers the greatest benefit when a simple-interest loan with no prepayment penalties is refinanced into a simple-interest loan with a lower rate. Prepayment penalties can quickly eat up the savings that might otherwise be gained by getting a new, lower-interest loan.
 
To evaluate an auto refi loan, consider both your interest rate and term of your loan. To reduce the amount you pay overall, refinance your loan at a lower rate for the same, or reduced, length of time. If you reduce the term of the loan (let's say you have 28 months left on your 48-month loan and you knock it down to 24 months) it may slightly increase your monthly payment, but if you can afford it, you can pay your loan off quicker and save more money in interest.

If you're looking for a way to keep more money in your pocket now, you can drop your monthly payments by refinancing your loan at a lower rate and extending the term. Just remember that doing this may increase the total interest paid over the life of your loan.

How much can refinancing really save you? By refinancing a $28,000 auto loan from a 9.0 percent interest rate to a 5.75 percent rate, over 60 months, you could save $43 a month, which adds up to $518 a year or $2,590 saved over the life of the loan.

And while you're in the process of investigating a re-fi, don't just go to one loan source. By comparing a number of loan offers before you refinance, you can see quite clearly where the best deal lies.

Jack R. Nerad, managing editor of Driving Today, wrote about auto financing options extensively in his book The Complete Idiot's Guide to Buying or Leasing a Car. 

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