By Philip Reed, Senior Consumer Advice Editor
As interest rates drop, people's thoughts turn to refinancing — refinancing their home loan, that is. What they don't know is that refinancing an auto loan is easier to do, and it can save you some serious money.
How much? Say you bought a new car six months ago. And say there were a few dings on your credit so the dealer told you that your auto loan would be 11 percent on a five-year loan for a $23,000 car. Your monthly payments are $500.
Now let's say that you surf the Web until you find a company that offers auto refinancing. You could refinance the balance of your car loan and lower your payments to about $400 a month. That's a savings of nearly $6,000 over the life of the loan.
Other examples could well be more dramatic. In some cases, a new-car buyer could wind up with an auto loan based on an 18-percent interest rate. By refinancing at a competitive rate, the monthly payments would be slashed, and all it takes is about 10 minutes to fill out the application.
Among the many players in the refi game, there are Up2Drive.com, Capital One Auto Finance and Bankrate.com. Bankrate.com refinances cars on a "referral" basis — taking loan applications and matching them with banks. (You may even get matched with Up2Drive.com or Capital One, both direct lenders.)
Online auto refinancing gives people the ability to go into a dealership as a cash buyer, making them far less vulnerable to profit-seeking salespeople who often confuse customers with interest rates and monthly payments.
So what kind of consumers should consider refinancing their auto loans? An industry expert I spoke with identified the four types and gave them each a name:
The Saver: This type of customer is always keeping an eye on the Fed (Federal Reserve) and when interest rates drop, he begins shopping for a way to improve his personal financial picture. He may also consider refinancing when his credit score has improved, which could enable him to qualify for lower rates.
The Newly Educated Remorseful: A car owner may have recently bought a new vehicle and financed it through the dealership. Then, a neighbor or friend innocently asks, "So what interest rate did they give you?" The car owner goes back to her contract and finds that the dealer made a pretty penny on her by marking up the interest rate by several percentage points. Buyer's remorse sets in…and the search for a new auto loan begins.
The Budgeter: This customer may have bought the car on a short-term loan — say, two years. The payments are high but affordable. Now suppose this customer's economic picture changes — he buys a house, for example — and his monthly expenses shoot up. He looks at that auto loan and wants to spread the payment out over a longer period of time. Refinancing the auto loan is just the ticket to do that.
The Lessor: Many consumers find that they want to keep their car at the end of their lease. Knowing a vehicle's performance, maintenance history and reliability can certainly be a plus. In some cases, however, the dealer is of no help establishing a loan. Doing a "buyout" — where the customer actually purchases the car and establishes a loan — is a smart move.
Consumers who are thinking of refinancing should visit Bankrate.com. By typing in the name of your state of residence and the city closest to you, a list of lenders and their rates are presented in an easy-to-read table. The table also shows whether a fee is charged; contact information is given, too. Be sure to look at the terms of the loans, as different terms will lead to different rates. Also, be aware that many of their lenders will run a credit check when you apply, which will reduce your FICO score by five or six points for about six months.
So, if refinancing is such a great move, why don't more people do it? Possibly, they anticipate the same kind of application-heavy process found in refinancing a home loan. It could simply be that people don't know it is possible. After all, the only risk is the 5-10 minutes it takes to fill out the application. Make sure, however, that no points are charged for the refinance process.
Remember, as the federal interest rate drops, auto loan rates follow. Why throw that money away paying interest? Join the wave of the future and surf the Web for a good new auto loan.
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