auto

Refinancing a car loan when money is tight

Tara Baukus MelloIf money is tight due to a job loss or other situation, refinancing your car loan is one way to reduce your expenses so they are more in line with your thinner wallet. But you'll likely have to extend the term of the loan to see a substantial drop in your monthly payment.

Refinancing your car loan to reduce your monthly payment is possible for many Americans, though it certainly helps to do it while you are current on your payments and not upside down in the car loan.

Your first step is to determine if you qualify to refinance your car loan. Most lenders only consider refinancing if you owe from $7,500 to $30,000, provided your car is less than 5 years old and worth at least what you owe. To determine your car's value, use a third-party vehicle pricing site. It's a good idea to check several sites as values may vary. Print out all the values because it may be helpful when you select a lender to refinance your car. If you are upside down, meaning you owe more than the car is worth, you may need to pay the difference in order to refinance. Don't let this deter you since it may still be worth it in the long run.

Next, look at the terms of your loan to determine what you owe, the interest rate you are paying and if there is a prepayment penalty. Then, shop around for the best rates to refinance your auto loan.

According to Bankrate.com's trend data, auto loan refinance rates are 1 percent to 2 percent lower than they were last April, depending on the length of the refinance loan. To see what you'll save, use Bankrate.com's auto refinance calculator to enter in the information for your existing and new car loans.

While in an ideal world, you don't want to extend the length of any loan. But with an auto loan, the amount you'll pay in interest can be rather small because the loan term is so much shorter than a mortgage loan.

For example, if you purchased a car for $28,000 in April 2008 and are financing it for five years at 6.53 percent (the national average at the time), your payments would be $548.25 and you'd owe $17,879.91 currently. Refinancing for the three years you have left on your car loan will reduce your monthly payment by only about $12 at the current national average of 5.05 percent.

However, if you refinance for four years, effectively adding a year to the auto loan at the national average of 5.38 percent, your monthly payment would drop by about $133 and you'd spend just $176 more in interest over the life of the loan. Extend it out to five years at the current national rate of 5.6 percent, your monthly payment would be $206 less and you'd spend about $804 more in interest over the life of the refinance loan.

While refinancing an auto loan is not for everybody, it may be a good option if you need to reduce your monthly expenses in order to get your finances back on track. You should keep the car for the length of the new loan since the longer term will keep you upside down for a longer period. As a result, you'd suffer a financial loss if you sell or trade the car.

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

Read more Driving for Dollars columns and Bankrate auto stories. If you have a car question, e-mail it to us at Driving for Dollars.

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