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Refinancing car loans can make sense now

Looking for a way to free up more cash in your budget?

Try refinancing the auto loan you signed a few months ago.

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With interest rates on a decidedly downward spiral, it's a good time to be shopping for a new and improved auto loan.

"I don't know if there's ever going to be a better time," says Jim Kash, marketing manager at Vista Federal Credit Union, headquartered in Burbank, Calif. "It's hard to imagine rates getting cheaper than they are now."

Fed cuts mean better rates
Nine rate cuts by the Federal Reserve Board in 10 months have pushed down interest rates on consumer loans, including auto loans.

In January 2001, Security Service Federal Credit Union in San Antonio, Texas, charged 8.5 percent to refinance a 60-month auto loan. It's now charging 6.25 percent.

"We have to adjust to the market because everyone else does, and if we don't we'll lose business," says John Worthington, senior vice president of corporate communications for Security Service Federal Credit Union.

"It's a very competitive time."

Auto buyers would be wise to cash in. There's a good chance you'll be able to beat the rate on your original loan.

"If you've financed a car in the last 18 months, it's worth looking at," says Remar Sutton, president of the Consumer Task Force for Automotive Issues. "You've got nothing to lose."

And lots of cash to gain. The money you save by refinancing an auto deal can really add up -- even if you only push the interest rate on your loan down a percentage point or two.

Say a borrower is paying 8.9 percent interest on a $10,000 loan over 60 months. The monthly payment is $207.10 and interest will total $2,426.74.

Drop the interest rate to 6.9 percent and the monthly payment dips to $197.54 and the interest to $1,853.05, a savings of $573.09.

With the economy slowing and job layoffs making headlines, who couldn't use some extra cash?

This calculator will help you pinpoint how much money you'll save by refinancing an auto loan to a lower interest rate.

Shop and save
Be sure to check out the deals available from local small banks and credit unions. Bankrate.com's auto loan rate search engine will help you find the best deal in your area.

Don't overlook online refinancing offers. Carlender.com allows you to refinance your old loan through its Web site. Other sites offering competitive auto loans include E-Loan and PeopleFirst.com.

Many of the best refinancing deals come from credit unions. Vista Federal Credit Union is offering 5.99 percent interest rates on new- and used-auto loans with terms as long as 60 months.

The Oct. 3 Bankrate.com national average for 36-month used-auto loans was 9.87 percent. A 5.99 percent financing rate on a 60-month used-auto loan is quite a deal.

"Obviously, not everyone gets 5.99," Kash says. "Even our members who get 9.99 or 11.99 -- it's still going to be significantly cheaper than what they got somewhere else. We've seen rates as high as 18.99 percent."

Just how much money can you save refinancing a loan through a credit union? Take a look at these success stories from University Federal Credit Union in Austin, Texas.

The credit union has been able to knock five, seven, even 11 percentage points off members' auto loans through its second-chance refinancing program.

"We're on pace to save our members $597,000 this year," says Bill Berglund, senior manager of lending at University Federal Credit Union, which has more than 100,000 members.

One member had the interest rate on her auto loan reduced from 18 percent to 6.99 percent for a savings of $4,157.

Another member loved everything about her new Lincoln Navigator -- except the financing deal she received through the dealer. She was paying 12.6 percent interest on an 84-month loan. University Federal Credit Union lowered her interest rate to 8.99 percent and reduced her financing term by 12 months. She saved a whopping $7,647.79 in interest.

It's not unusual for new-car buyers, even those with good credit, to walk away loving their vehicles and hating their financing deals. Sometimes the interest rate is too high. Sometimes the price of the vehicle gets bumped way up because the customer agreed to buy an extended warranty or other dealer add-ons.

"They get caught up in the excitement of it," Berglund says. "A lot of times we get real solid members who just paid too much for the car."

The sooner you refinance a high-priced auto loan, the better off you'll be. So get on it. There's no point in paying the high interest rate on the auto loan you signed a few months ago.

Problem credit? No problem!
And if you had credit problems in the past, refinancing might be a good option even a year or two into an original loan. Let's say that, because of damaged credit, you accepted an auto loan with an interest rate of 18 percent or more.

If you've built up job stability since the purchase and made loan payments on time for a year or more, you may qualify for a lower interest rate. It's worth checking out.

The first step to getting a better loan is taking a closer look at the loan you've already signed.

How is the rate on your current loan calculated? Is it calculated with simple interest? With a simple interest loan you're charged interest each day based on the balance you owe. Most, but not all, auto loans are simple interest loans.

Does your current loan charge prepayment penalties? Some loans smack borrowers who pay off a loan early with fees ranging from $25 to $200.

Refinancing makes the most sense and yields the biggest savings when a simple interest loan with no prepayment penalties is refinanced into a simple interest loan with a lower rate.

Keep your eyes peeled for fees. States charge from $4 to $40 for changing the name of the lender on a car's title. Some lenders absorb that cost, others pass it on to customers. And some lenders charge processing fees. Be sure to ask.

 

 
-- Posted: Oct. 10, 2001
   

 

 
 

 

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Compare today's rates
NATIONAL OVERNIGHT AVERAGES
48 month new car loan 3.15%
60 month new car loan 3.16%
48 month used car loan 2.91%




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