Navigating a Car Loan Refinance for Long-Haul Savings

Low auto loan rates may drive you to refinance your car and save money. It’s worth looking into, but check out these tips to avoid potholes on the road.

If low auto loan rates are driving you to refinance your vehicle, steer yourself first to the web, where you can wheel and deal.

Refinancing a loan on what may be your single largest purchase, a home, can save you hundreds of dollars a month, or thousands over the life of the mortgage, says Money Talks News financial expert Stacy Johnson. So it makes sense to check out refinancing your second-largest purchase, your ride.

But there are a few things you need to watch for to avoid potholes on the road to savings, Stacy says.

Get on what we used to call “the information superhighway” — the web — and search for auto refinance rates — not rates for new or used cars.

You can pull up to the Money Talks News Solutions Center, click Car Loan and start your money-saving quest by entering your credit score range, amount of the loan and ZIP code in the car loan tab. Responding credit unions will post terms, such as 36 or 50 months, interest rates, expected monthly payments and their contact information.

Credit unions tend to offer loans at rates lower than banks because members pool their assets to provide loans and other financial services to each other.

You can also compare rates and terms on the websites of your local credit unions and banks.

Ride to savings

Compare rates with what you’re paying now. Your situation may have changed. Perhaps you tuned up your credit score so you can qualify for a better rate than you did when you bought the car.

For example, according to online loan calculators, such as those at Nationwide Insurance or Bank of America websites:

Say you bought a new car in April 2013 and financed it with a then-typical new-car loan of $27,500 for 60 months at 4.1 percent interest. After making your 24th monthly payment of $508, you could refinance your loan balance of $17,170 for 36 months, the time left on your current loan, at just 1.5 percent, a rate offered by several credit unions in the Money Talks News Solutions Center for borrowers with good credit scores. Your monthly payment would drop to $488. Assuming no closing costs, that’s a savings of $20 a month, or $720 over the next three years; the interest savings alone would be $707.

Most interest is paid in the first half of the loan, Stacy reminds us, so the younger the loan, the more you’ll save.

Say you bought your car with the same financing terms as above, but in April 2014, and you’ve only made 12 payments. If you get a 48-month loan at 1.5 percent interest, the monthly payment on your higher balance of $22,441 drops to $482 from $508. That’s a $26-a-month savings, or $1,248 over the next four years; the interest savings would be $1,235, loan calculators show.

Before you green light a loan, give your current lender a chance, Stacy says. Many will refinance your loan at a rate below what you’re already paying because they want to keep your business.

Avoid potholes

Make sure there are no penalties for paying off either your original loan or your refinancing package early or you could see your savings transmission slip a gear.

Lenders may have other loan conditions that could leave your refinance decision in the ditch. For example, Bank of America sets a minimum refinance amount of $5,000 and requires your car be no more than 10 years old and have less than 125,000 miles on the odometer.

Your credit history will be key to the terms of loans available to you, lenders say. The higher you score in a credit report, the better the loan terms you can land. You can take steps to improve your credit score and get the best deal on a car loan.

You can take the back roads to car refinancing with longer terms and lower monthly payments, but ultimately you’ll pay more interest. You also don’t want to take a detour by refinancing with terms that extend the life of the loan even if your monthly payments go down. Shortening the loan generally puts you in the fast lane to financial freedom. The shorter loan term allows you to build equity in your car faster. Even if your monthly payment goes up, and you can afford it, you’ll pay less over the length of the loan.

Look at the total cost of the loan refinancing as your road map. If it shows a route to savings, you just might want to take it. With the savings, your next trip could be a journey to investing.

Stacy Johnson

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