Re-Fi Your Car?

If you own a house, you may have refinanced your mortgage lately. Some folks have actually re-financed their home loans three or more times in the last two years as interest rates have continued to fall to unheard-of levels. But should you consider refinancing your auto loan? Next to a home mortgage, a car loan seems trivial in both length of term and monthly payment, so does going to the effort to arrange refinancing make any sense? Well, hundreds of thousands of consumers apparently feel it does make sense.

Industry data shows that the number of auto loans that have been refinanced has increased by 75 percent in two years. Nationwide, about 450,000 auto loans were refinanced in 2002, up from more than 297,000 in 2001, according to Bandon, Oregon-based CNW Market Research. That number is expected to grow to 525,000 refinanced loans by the end of 2003.

"Refinancing presents a solid opportunity to save money, particularly if you've owned your car for a year or more," said Mike Johnson, Auto Club vice president of marketing and product management. "Lowering the interest rate on your auto loan by even a percentage point or two can make a big difference. It will lower your monthly payments and save hundreds of dollars in interest over the life of the loan."

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 thrills of application fees, registration fees, closing costs and the like. But if you find the right lender, refinancing your vehicle can often be accomplished with very 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.

Are you afraid the savings won't be worth the effort? You have to decide for yourself if $1,500 is worth a 10-minute phone conversation or visit to a Web site. Here are examples of how vehicle refinancing works:

Let's say you are consumer who bought a new SUV last year and financed $30,000 for five years at eight percent. You currently have a monthly payment of $608. If, after one year, that loan were refinanced at five percent, the payment would drop to $574 a month -- a savings of more than $1,600 over the life of the loan.

Obviously, the larger the loan being refinanced, the bigger the savings. But even if you have a significantly smaller loan, you can still realize some pretty handsome, in-your-pocket cash. If you refinanced a 60-month $16,000 loan after one year -- dropping from an eight percent APR to five percent APR - it will save you $882 over the life of the loan. The bottom line is, if interest rates are lower (the rule of thumb is by one percentage point or more), then car owners can save money by refinancing.

Will everyone benefit from refinancing? While many will gain some benefit from securing a lower-interest rate loan, it works best for someone who is in the first couple of years of a loan rather than near the end of the loan term. You are also a strong candidate for a re-fi if previously you had a poor credit history but now your credit history has improved.

Just as when buying a car, if you want the most significant savings, don't look only at the monthly payment. One way lenders can lower the payment is to extend the term of the loan, but that can end up costing you money rather than saving you because the total of your payments could well be more than the original balance.

How do you go about refinancing your car loan? Most major banks and financial institutions will refinance loans, but as with mortgages, some of the most competitive rates can be found on the Internet. The Auto Club's financial services program provides competitive auto loan refinancing rates for members through its Web site.

Driving Today Managing Editor Jack R. Nerad, the co-host of the nationally syndicated "America on the Road" radio program, writes frequently on consumer issues.