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  Dear
Dr. Don,
I recently purchased a vehicle and financed it through the dealership,
but later found out that the dealership actually went through a
bank. The rate, in my opinion, was not very good -- 7.59 percent
for 75 months. I have a chance to refinance the vehicle through
my credit union at 5.90 percent for 72 months. I have already paid
one payment. The only catch is that the rate through my credit union
is subject to future adjustable rates. What should I do?
-- Ben Betwixt
 Dear
Ben,
Bankrate's national average for a 48-month, new-car
loan is 7.83 percent. Your loan is for 75 months or 6 ¼ years.
The longer the loan, the greater the risk the lender faces, especially
when the borrower makes a small down payment. Refinancing rates
are typically a little higher than new-car rates.
Dealerships are in the business
of selling cars, and arranging financing to sell those cars is part
of that business. That doesn't mean that they lend you the money.
Doing so would limit the amount of cars they could sell to the amount
of money they could dedicate to the loan portfolio.
The real issue in dealer financing
is making sure you get a competitive rate based on the loan terms
and that the dealer isn't steering you to a lender based on financial
incentives the lender offers the dealership to get customers to
finance with that lender. That's why it's always a good idea to
have a handle on where auto loan rates are in your market when you
go shopping for a car. Bankrate reports the national
averages every week and you can also search
rates in your market using Bankrate.
Looking at your current rate vs.
the one your credit union offers is an apples-to-oranges comparison.
The credit union is offering a lower rate because it's a variable
rate, forcing you to take on the interest rate risk if rates go
higher, which they're expected to do.
If you're considering making this
move, make sure you understand how the interest rate is determined,
how often it can reset and whether the loan rate has a floor (minimum)
or ceiling (maximum) rate. Ask the credit union for their rate on
a fixed-rate loan and see how that compares to your current fixed-rate
loan. You also need to consider whether there is a prepayment penalty
on the new loan, and the costs associated with refinancing the loan.
If your choice is between the existing fixed-rate
loan at 7.59 percent and a variable-rate loan at 5.90 percent over
a similar term, I'd stay with the fixed-rate loan. If you can get
a better fixed-rate loan, then you should consider refinancing.
The Bankrate feature, "Refinancing
your car," has more information on how to evaluate refinancing
your ride.
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