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Refinancing … Is there a better deal out there?

When you hear the word refinancing you probably think of a home equity loan or a mortgage…but have you heard the buzz about refinancing your auto loan?  It may be one of the best-kept secrets in lending.

Over the past year many financial institutions have lowered rates on auto loans, which could mean significant savings for customers looking to refinance.  According to Bankrate.com’s weekly “National Index,” rates on a 48-month used car loan averaged 6.03% (as of Oct. 13, 2010).  So, if you bought a $15,000 used car last year paying an interest rate of  8.00% or higher for 60 months, you could potentially refinance your remaining loan balance and save roughly $10 on your monthly loan payment, nearly $1,000 in finance charges, and still pay off the loan in four years.  That could mean over $1,400 in savings!

But before you rush out to sign on the dotted line, here are a few things to consider.

First, shop around for the best rates.  A bank’s advertised rates are usually for customers with the best credit.  If your credit is less than perfect, be prepared for a higher rate.  On the other hand, if your credit has improved since you bought your vehicle, you may now qualify for the better rate.  It pays to know what’s in your credit report before you shop around.  Go to annualcreditreport.com to request a free copy.

Second, how long have you been paying on your current auto loan?  With most auto loans, the amount of your payment going towards interest each month decreases as you reduce your outstanding balance. So the longer you’ve been paying on the loan, the less savings you may see by refinancing.  Call your lender and ask for a payoff quote.  This will tell you, if you paid off the loan today, how much you could save over making the scheduled payments.  Compare this to the amount the new interest rate will cost you.

Next, what fees are involved?  You will likely have to pay a title transfer fee to switch lenders.  This cost varies from state to state.  In addition, some lenders charge application or processing fees to complete a loan.  Any fees will eat away at your potential savings.

Finally, how long do you plan to keep your vehicle?  If you plan to trade it in over the next year or so, will you save enough to make it worthwhile?  Also be careful of offers to extend the length of your repayment term past your original maturity date.  Longer terms might mean a considerably lower monthly payment, but that doesn’t necessarily mean you’re saving money over time.  You could be adding unnecessary months or years of finance charges.

There are no quick answers when it comes to refinancing.  On the surface it sounds like a “no brainer,” but everyone’s situation is different.  You may have to do a little research and crunch a few numbers.  Still, lending’s best-kept secret could become your best deal.

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Posted in Banking Basics, Financial Education, Mortgages and Homeownership.

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