Why Auto Loan Refinancing

Loan refinancing is usually associated or focused on mortgage refinancing.  But an overlooked category of loan refinancing is car loan refinancing.  After home purchases, automobiles are often the second largest purchase a consumer makes.  A number of consumers may also be able to save money on their monthly car loan payments and total interest charges by refinancing an existing car loan just like refinancing a mortgage.

Interest rates have fallen on most all bank products including car loans as inflation has subsided measurably in the past year and the economy has slowed.  The point to which interest rates have dropped makes refinancing an auto loan worthy of evaluation.  In this environment, consumers may be able to save money if they can reduce the rate substantially without extending the term of the loan appreciably.

Car loan refinances are not a measurable segment of lending because the interest rates on used car loans are higher than those for new car loans.  Rates are higher because used car loans are generally considered riskier loans for auto lenders and banks.  Even if a consumer is looking for an auto loan for the purchase of a used car, the interest rate on the loan for the used car will be higher than that for a new car loan.  Some car loan companies simply don’t engage in refinancing auto loans because of the perceived added risk. 

Regardless of the slightly higher rate or premium attached to used car loans, interest rates have fallen so much that the average used car loan rate, in some cases, is below the average new car loan rate that existed in previous years.  This means there are still a number of car owners with auto loan rates above the prevailing used car loan interest rate.  These car owners may be able to save money and get a lower rate today with a car loan refinance.

For some existing car owners there may be an added benefit to refinance at existing car loan rates due to a change in credit.  If a car owner received a high rate on their original loan because they had bad credit but have since improved their credit profile, refinancing the auto loan would yield an important benefit and potentially sizable savings.

Of course, refinancing a car loan can make sense even when interest rates are not falling.  Some car buyers who finance the purchase through a dealer have paid higher rates than they need to and would earn a substantial savings by shopping for new car loan.

The first step for refinancing a car loan is similar to getting a new car loan, shop around and compare your current auto loan rate to what is available for an auto loan refinance.  When comparing car loan rates and terms, be careful to make sure the new auto loan is not just extending the life of the loan.  Extending the term of car loan when refinancing will not save money in the long run just by getting a lower monthly car payment.  When the consumer winds up making more payments with a longer term car loan without a sizable reduction in the monthly payment, the costs of the total payments over the life of the loan can be a costly proposition.  Extending the term with a lower rate may be a viable option if adequate savings are realized or monthly payment relief is the primary objective of the new car loan.  

Refinancing an auto loan does involve getting a new loan, but the process for getting approved for a refinance is relatively quick and does not require an abundance of paperwork.  For those car owners that took out a loan to buy the car in the past two to three years, they may meet the criteria to refinance it at today’s lower auto loan rates and save hundreds of dollars.  The savings can run from $200 to over a $1,000 depending on the car loan amount and interest rate.  It only takes minutes to refinance an auto loan and generally costs very little to switch to a new loan and payment.  

Tags: auto loan rates, auto loans, car loan refinance, car loans, used car loan

This entry was posted on Monday, February 9th, 2009 at 1:10 pm and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.