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
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
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
With the economy slowing and job layoffs making headlines,
who couldn't use some extra cash?
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
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
Many of the best refinancing deals come from credit
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
"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
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.