Refinancing your car
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.
Since interest rates are still low, 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
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
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
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
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.
Thanks to a new law,
everyone is entitled to a free copy of each of their three credit reports each
-- Updated : April 16, 2005