Steer Clear of Auto-Loan Refinancing

When Refinancing Can Make a Difference

The people who benefit most from an auto refi, the experts say, are those who received extremely unfavorable rates because of a poor credit history when buying a car a few years ago. "A good scenario is someone who has borderline credit, maybe a young person who bought a car and had to finance at a high rate," said Phil Reed, consumer-advice editor at Edmunds.com, who adds consumers can get better rates because "car dealers have a big markup on the financing they sell -- sometimes by 4% or 5%."

Once you get above 10% for a car loan, it's a different ballgame. If you had $10,000 at 14% with 36 months left and could get into a 7% with the same terms, you'd save $33 a month and nearly $1,200 over the life of the loan. Clearly, refinancing would be a no-brainer.

Or, look at the example shown in the table below. A lower rate may reduce your monthly payment, but that doesn't mean you should spend the difference on fancy dinners. Instead, apply the difference in your payments to the loan balance. You'd pay off the loan in 33 months instead of 36 months and save even more on interest costs. An even better bet -- use the monthly savings to pay off that credit card.

How to Get the Most Bang From Cheaper Bucks Refinancing makes sense when the numbers look like this
Scenario	Balance	Rate	Length	Monthly Payment	Total Interest
Original Loan	$20,000	12%	36 months	$664.29	$3,914.30
Refinanced Loan	20,000	6	36 months	608.44	1,903.79
Refinanced Loan with Original Monthly Payment	20,000	6	33 months	664.29	1,730.34
Source: Bankrate.com

"People who are two years into a five-year loan tend to benefit most because of the way rates have fallen and because they still have a sizeable amount left to pay," said Reed.

And unlike refinancing a home, there are few fees (if any) associated with refinancing an automobile. "The only cost is to retitle the car in whatever state you're in and that's about $25. And unlike a house, it's extremely easy. You don't need to get the car reappraised or fill out tons of paperwork," said Joe Kennedy, president of online lender eLoan.com.

Figuring out if it works for you is a snap. Bankrate.com and Edmunds.com both have excellent calculators that allow you to see how rate, time and payments can affect the total interest you'll pay.

Just remember to look at the bottom line, not the monthly payment. "We're living in a climate where people are tempted by short-term gains. It's so easy to get into a new car with those 0% financing deals out there," said Reed. "But these banks and automakers know what they're doing. You'll usually end up spending more in long run."