Refinancing a subprime car loan

Dear Dr. Don,

Dear Greg,
I'm sorry that you got caught in such a high-rate loan for your car. There are a lot of different variables involved in timing a refinancing, but getting a lender to consider you as a candidate for a refinancing when you don't have much of a credit history requires you to establish a good payment history on this loan.

Another consideration is what your car is worth. A new car's value depreciates rapidly in the first two years of ownership. If you have a loan balance of $20,000 on a car that's only worth $15,000, then it will be harder to refinance the vehicle at a lower interest rate.

Once you qualify, taking out a new loan isn't all that expensive. A loan-processing fee and a fee for changing the lender on the title may be all the expenses you face in refinancing your car. Weigh that cost against the potential savings in interest expense.

Review your existing loan document to make sure there's no prepayment penalty and that the loan isn't computed using the Rule of 78s, which has a built-in prepayment penalty. This Bankrate feature has more about these potential problems and other issues in refinancing a vehicle.

The sooner you can refinance at a lower rate, the more money you'll save by refinancing. Start shopping too soon, however, and you'll just be frustrated and get a pile of credit inquiries on your credit report.

Applying for multiple car loans in a short period of time (three to four weeks) doesn't wreak havoc on your credit score like filling out multiple applications for credit cards would. That's because car loans are secured loans backed by the value of the auto and it's clear that you're comparison shopping when you apply for several auto loans in a short time span.

Bankrate's auto loan calculator, with its amortization schedule, will calculate how much you'll pay in interest over the life of your loan. I'd give it a minimum of six months of on-time payments before you start shopping to refinance the loan.

Before you start shopping, invest $12.95 to get a copy of your credit report and credit score using Bankrate's sponsor link. The credit score will let you know whether you've built enough of a credit history to make it worth your while to find a new lender.

-- Posted: July 2, 2004