Time to Refinance Your Car?
If you haven’t noticed lately, the American economy is in doldrums. That’s not considered good news for consumers, but there are some silver linings in the cloud, and one of them is lower interest rates. The federal government and the central bank are trying to give the economy a boost by keeping interest rates at historically low levels. That means you can borrow money cheaply, and many people are taking advantage of that by refinancing their home mortgage. In fact, some folks have actually refinanced their home loans a couple of times in the last few years as interest rates have continued to fall to unheard-of levels. But did you know you can also refinance your auto loan. Sure, a car loan seems trivial in both length of term and monthly payment compared to a mortgage. That doesn’t mean, however, that you should not investigate the opportunity, because it could be a big money-saver or help you get through a period of lower income.
Experts say that refinancing presents a solid opportunity to save money, particularly if you’ve owned your car for a year or more. 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. Of course, those with long loans at high interest rates will benefit the most from the process.
So is vehicle refinancing right for you? Well, as with any financial decision, it really depends on your individual goals. If your goal is to reduce the amount you are paying in interest, you should consider an auto loan with a term (length) that is the same as, or shorter than, that of your existing loan. If your goal is to have a smaller payment, you may want to consider getting a new loan that has a longer term than that of your existing loan. You should keep in mind, though, that this will likely result in you paying more interest in total.
A big question many people have about auto loan refinancing revolves around the fees involved. They’re accustomed to home loans that are accompanied by a variety of fees. The good news is that the fees that are associated with car loan refinancing are much easier to swallow. Typically, the only fees associated with an auto loan are fairly standard transfer of lien holder fees (usually $5 to $10) and state re-registration fees ($5 to $75). These estimated fees may vary by lender and the state in which you live, but they won’t break the bank. It is very important, however, to check with your existing lender to see if your current auto loan has any prepayment fees. This could turn a good deal into a no-go. Prepayment penalties can quickly eat up the savings that might otherwise be gained by getting a new, lower-interest loan.
How much you will save by doing an auto re-fi depends entirely on things like the remaining balance of your existing loan, the difference between your old interest rate and the new interest rate, and the term of your new loan. Examine each of these factors carefully to make certain the refinance of your car loan works in your particular circumstances.
Luigi Fraschini is a Driving Today contributing editor who writes frequently about consumer issues. He is based in Cleveland.