Steer Clear of Auto-Loan Refinancing

When Refinancing Doesn't Work

Let's say you purchased a car two years ago and got a 60-month loan with a rate of 8%. Today, you've got 36 months left, a loan balance of $10,000, and a monthly payment of $313.36, which you'd like to refinance to save some money. While the allure of lower monthly payments is strong, remember that it costs you in the long run.

Let's take the $10,000 balance and refinance it into a 6.55%, 72-month loan currently offered by PeopleFirst.com, an online lender. Thanks to the new rate and longer term, you'll have a monthly payment of just $168.34.

But while the new payment is half as much, your loan term is twice as long, which means you'll pay $12,120.30 over the life of the loan. If you did nothing and stayed with the 8% loan, you'd only pay $11,281.09 -- about $850 less. [See below.]

Short-Term Fix, Long-Term Problem Yes, lower rates always reduce your monthly payment, but in the long run you pay more
Loan Type	Balance	Rate	Length	Monthly Payment	Total Charge
Original Loan	$10,000	8.00%	36 months	$313.36	$11,281.09
Refinanced Loans	10,000	5.49	36 months	301.91	10,868.90
	10,000	5.95	60 months	193.10	11,585.74
	10,000	6.55	72 months	168.34	12,120.30
Source: PeopleFirst.com

"The environment is very conducive for refinancing, but in the case of auto refinancing, it's not something that works for most borrowers," said Greg McBride, financial analyst at rate-tracker Bankrate.com. "Auto refinancing only generates tangible savings given two things. One: A tangible reduction in the interest rate. And two: Not extending the term of the loan."

So don't be fooled by the rates. While there is a 250 basis-point difference between the original 8% loan and the 5.49% refinancing offered by PeopleFirst.com, you'll save just $11.45 a month on payments and slightly more than $400 over three years -- and that's without extending the loan term. Add another two years and you'll pay more.