Issue Date: February 23, 2003
Car refinancing
Check it out: Super-low interest rates mean lower monthly payments.
A three-year used-car loan now averages 6.4%.
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You've refinanced your mortgage to below 6%, consolidated your credit card debts onto a Visa card at a competitive 12% and even reduced the rate you're paying on your student loans. Can you do anything else to take advantage of today's ridiculously low interest rates? Surprisingly, yes: You may be able to refinance your car loan and save significant bucks not only on your monthly bills but also over the life of the loan.
As more people clue in, a steady stream of car loan refinancing applications has resulted. Online vehicle financing (including refinancing) is expected to grow into a $32 billion business by 2006, according to Jupiter Media Matrix, a research firm that tracks Internet industries. The best news: It's much easier, in most cases, than getting a new mortgage. Why? No appraisal process, for one thing. With a car, most lenders rely on values from the "Kelley Blue Book", the used-car pricing guide.
Where can you go to refinance an auto loan? The Web, to start. Institutions you might regard as mortgage lenders -- PeopleFirst.com, LendingTree and E-Trade -- are also in the car loan business. Credit unions are the other dominant players; one recent survey indicates that auto refinancing has become a significant business for more than two-thirds of them. Shop around online. Bankrate.com has a nifty auto rate search engine that can help you find the best deal in your area. If you belong to a credit union, call that institution, too.
The fees -- if any -- are minimal. Sometimes there's an application fee of around $20, although most online lenders don't charge one. Some charge processing fees and some don't; be sure to ask. You also may have to pay $5 to $10 to your state's department of motor vehicles to get a new car title. (And if your old loan has a prepayment penalty, you'll need to factor that into your out-of-pocket costs to refinance; more about this point later.)
The national average for a four-year new-car loan was 6% at press time, according to Bankrate.com (that's about 2 percentage points lower than it was a year ago). One thing to keep in mind, however, is that when you refinance, you are taking out a used-car loan. Rates on those can be higher than on new-car loans; a three-year used-car loan now averages 6.4%. But that may be substantially lower than the rate you currently pay.
How much can you expect to save? Let's say you owe $25,000 on your three-year car loan. Your original interest rate is 8%, on which your payment is $783 a month. By shopping around, you find an interest rate of 5.4%, considerably less than the average rate. That reduces your payment to $753. Total savings over the life of your three-year loan: nearly $1,100.
Once you have determined a lower rate is available, it's time to figure out whether you are a good candidate to proceed with a new loan. We asked experts from Bankrate.com and Brian Reed, president of PeopleFirst.com, the country's leading car loan refinancer, about when you should go back to the well:
When you didn't shop well in the first place. Even if you bought your car recently, you don't have to wait some special period of time to refinance. Typically, if you purchased a car through a dealer (and didn't get 0% financing or a similar deal), you may have come out with a rate in the 8% to 9% range. The lesson here is always to look for a competitive loan before you buy a car. Do that by shopping for financing before you hit the showrooms. Check credit unions, banks and Internet lenders to see who will offer you the best rate. Then see whether the manufacturer has a financing deal that can beat it. Just to be safe, make sure there are no prepayment penalties on whatever loan you do take. That way, if rates fall significantly again, you can take advantage of them.
When you still owe a sizable amount. Most lenders require a car to be less than 5 years old and have a minimum balance of $7,500 in order to refinance. Your car is collateral, so many lenders won't underwrite a loan that's not worth the amount you owe on it.
When your credit has improved. If you bought the car when your credit was blemished and now it's pristine (or if you had little credit history at all), refinancing can mean a significant drop in rates. Say the original 60-month loan was at 11% on a $23,000 car. That would put your monthly payments at around $500. By refinancing at 5.8% (rates on 60-month loans are higher than on 36-month loans), you could save $57 a month, or more than $3,200 over the life of your loan.
When you're having a cash-flow crunch. As with a mortgage, refinancing your car loan into a longer term as well as a lower rate can substantially lower your monthly payments.
One final note: In addition to a straightforward car refinance, another money-smart strategy might make sense. If you refinance your home, you can pull cash out to pay off a car loan at the same time. Because mortgages (unlike car loans) are tax deductible, some say that's a very smart move. Just don't go crazy spending in other ways -- like buying that sports car you covet. Remember, you're still paying for the first car; you're just writing a different check.
Jean Sherman Chatzky is the author of "Talking Money" (Warner Books, $24.95). Additional reporting by Brian B. Reid.
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