Debt Management Basics
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Refinance your auto loan

Love your car but not the hefty interest rate you're paying? Refinancing may be the way to go.

If you've built up job stability, made loan payments on time for a year or more or have otherwise improved your credit rating, you may qualify for a lower interest rate. However, if you have encountered damage to your credit or the car since the loan's inception, this may not be the time to refinance -- it might actually negatively affect the interest rate you get on any subsequent refinancing attempt.

Borrowers in good standing with the lender may be able to get a rate modification in which the lender agrees to simply lower your interest rate. Check this option first. If the lender is willing to reduce the rate, you'll capture any interest savings without a refinancing. You'll potentially save time and money.

If your current lender is unwilling to reduce your interest rate, start on the path to refinancing your loan.

The first step is to review your current loan documents.

  • Find out how high or low your credit score is by ordering your credit report. Every consumer is entitled to one free credit report each year. Or, you can order your reports. Here's how.
  • Find out if your current loan charges prepayment penalties. Some loans smack borrowers who pay off a loan early with fees ranging from $25 to $200.
  • Find out how the rate on your current loan is calculated. Is it calculated with simple interest? With a simple interest loan, you're charged interest each day based on the balance you owe. You're looking to make sure that there aren't any prepayment penalties, and that you don't have a loan where interest is calculated based on "The Rule of 78s."
What is The Rule of 78s?
With a loan using this rule, the lender typically collects three-fourths of a loan's interest in the first half of the loan term. 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. Check the front of a loan contract to see whether it allows a refund or rebate of interest. That's a sure sign you've signed on for a pre-computed loan. The good news is that most auto loans today don't use this rule.

Changing rates

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. So, start shopping for a better rate. This Bankrate search engine can help you find the best rates in your area.



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