Refinancing your carBy
Lucy Lazarony
• Bankrate.com
Love that shiny new car you just
bought, but not the hefty interest rate you're paying? Refinancing
may be the way to go.
Remember, even people with good credit get stuck
paying high interest rates on auto loans.
That's because folks get so caught up in the excitement
of buying a new car that they don't pay enough attention to the
financing deal. They know they've got a nice new car and little
else. Later, they're shocked at the sky-high financing rate they've
agreed to pay.
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.
Inching a loan's interest rate down even a percentage
point or two can save hundreds of dollars in interest and bring
lower monthly payments. 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.
This calculator will help you pinpoint just how
much money you'll save by refinancing an auto loan to a lower interest
rate.
With interest rates on a decidedly downward spiral,
this is a great time to be in the hunt for a new and improved auto
loan.
The first step to getting a better loan is taking
a closer look at the loan you've already signed.
Does your current loan charge prepayment penalties?
Some loans smack borrowers who pay off a loan early with fees ranging
from $25 to $200. 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.
We'll discuss this more later, but for now keep in
mind that 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.
Where should you go for refinancing? Be sure to check
out the deals available from local small banks and credit unions.
This search engine from Bankrate.com will help you search
for loan rates in your area.
Many small banks and credit unions send refinancing
solicitations to recent car buyers. These offers may turn up in
your mailbox just a few weeks after you've purchased a car. So be
on the lookout.
You may also want to hop online. Carlender.com allows
you to refinance your old loan through their Web site. Other sites
offering competitive auto loans include E-Loan
and PeopleFirst.com.
Be on the lookout for fees when shopping for an auto
loan. 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.
Don't get surprised by the terms of your loan
But before you start shopping for a better loan,
make sure your original loan is a simple interest loan. Most, but
not all, auto loans are simple interest loans.
Some subprime lenders offer pre-computed loans instead.
Once you sign on the dotted line for this type of loan, you're obligated
to pay back principal plus the full amount of interest that will
accrue over the entire term of the loan.
If you've signed on for a pre-computed loan, there's
a good chance your lender will use the archaic and costly "Rule
of 78s" formula to calculate a "rebate" of finance
charges should you pay off a loan early or refinance. This rebate
is actually a sneaky prepayment penalty.
For a borrower looking to end an auto loan early,
there isn't a worse way a lender could calculate your payoff amount.
Using the "Rule of 78s" method, your lender applies more
of your previous payments toward interest and less of your previous
payments toward principal.
Using "Rule of 78s," a lender typically
collects three-quarters of a loan's interest in the first half of
a loan's payments.
The earlier you try to pay off one of these loans
the more you'll have to pay. The higher the interest rate, the more
that payoff amount is going to hurt.
Buy here/pay here auto lots and lenders that specialize
in offering loans to borrowers with badly damaged credit may offer
these consumer-unfriendly loans. Folks with less-than-perfect credit
should be on the lookout.
How can you tell if you've signed on for a pre-computed
loan instead of a simple interest loan?
Check the front of a loan contract to see whether
it allows a refund or rebate of interest. That's a sure sign you're
about to sign on for a pre-computed loan.
And because it puts the most bucks in his pocket,
there's a good chance that a lender offering a pre-computed loan
will apply the Rule of 78s formula to all prepayments.
Flip over to the back of the contract and look under
the section on prepayments for further details. Some contracts even
mention Rule of 78s.
Avoid signing on to loans that apply the Rule of
78s formula to prepayments. If you've already signed on the dotted
line, you're best bet is to make your payments as scheduled.
On your next auto loan, insist on a simple interest
loan with no prepayment penalties.
In any case, to snap up a good financing deal, you'll
want to make sure there are no unpleasant surprises on your credit
report.
This step-by-step
guide from Bankrate.com will show you how to request copies
of your credit report from the three major credit bureaus and how
to correct any errors you may find.
Remember, the sooner you refinance a high-priced
auto loan, the more money you'll save in interest. So get to it.
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