Steer Clear of Auto-Loan Refinancing

Refinancing -- it's not just for homeowners anymore.

Over the past few years, car owners have also taken advantage of declining interest rates and refinanced their auto loans at lower rates. But in doing so, many have kept themselves on the debt treadmill, opting for a little monthly savings at the expense of higher costs over the life of the loan.

"It's on the rise -- 450,000 people will refinance their car loans this year, nearly three times the 172,934 people who refinanced in 1999 and 297,363 who refinanced in 2001," said Art Spinella, vice president and general manager at auto-market researcher CMW. "The low interest rates are a key part of the increased demand."

As of last week, the average national rate on a 36-month used car loan was 9.12%, according to Bankrate.com, the lowest it has been in the five years has tracked auto loans. Two years ago, the same loan had a rate of 10.82%.

But because a car can depreciate as much as 20% from the second you drive off the lot, it's in your best interest to pay off the car as cheaply and quickly as possible -- something many refinancers never take into account. Instead of using the low rates to pay off loans in a hurry -- a useful exercise -- many auto refinancers opt to extend the terms of their loan, which reduces monthly payments but increases the total interest paid.

"The current monthly payment, on average, is $517. For people who refinance, their new loan has a monthly payment of $410. But nothing has really changed," said Spinella. "They just stretched out the amount of time they had to pay off the loan. On average, they extended their loans by 28 months, basically adding two years."