In spite of recent interest rates hikes, you may still be able to save money by refinancing your car loan. Here's how to do it, while avoiding common potholes.
Refinancing a loan on what may be your single largest purchase, a home, can save you hundreds of dollars a month — thousands over the life of the mortgage. Likewise, it makes sense to check out refinancing your second-largest purchase, your ride.
Interest rates are starting to edge upward from their rock-bottom lows. Still, if you secured your current auto loan through a dealership’s financial office, you may still save big by refinancing through a credit union or other traditional lender.
But there are a few things you need to watch for to avoid potholes on the road to savings.
Get online search for interest rates for auto refinance — not rates for new or used cars.
You can start comparing rates in the car loan section of our Solutions Center. Enter your credit score range, amount of the loan and ZIP code in the car loan tab. Responding lenders will post terms, such as 36 or 50 months, interest rates, expected monthly payments and their contact information.
Compare rates and terms on the websites of your local credit unions and banks. In general, 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.
And don’t forget to ask your current lender for rates to refinance your auto loan. Many will refinance your loan at a rate below what you’re already paying because they want to keep your business.
Is your credit score a speed bump?
Once you’ve gathered the rates you can secure if you refinance, compare them with your current rate. Perhaps you tuned up your credit score or joined a credit union so you can qualify for a better rate than you did when you bought the car.
If poor credit is preventing you from finding a cheaper loan, you may need to first take steps to improve your credit score.
Even if your credit is sterling, factors beyond your control may negatively impact your refinancing prospects. Lenders consider the state in which you live and even the current auto sales environment when setting loan rates and requirements. And, as noted, interest rates are beginning to climb.
Watch out for potholes
If you find a loan at a favorable rate, that’s a great start, but be sure to read the fine print on all contracts. You need to know if you will pay penalties for paying off either your original loan or your refinancing package early. If so, refinancing may not make sense.
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 ($7,500 in Minnesota and South Carolina) and requires your car be no more than 10 years old and have no more than 125,000 miles on the odometer.
Be sure to consider the overall cost of the loan.
You may be refinancing in order to get lower monthly payments over a longer term. That’s fine, but remember that taking the scenic route will cost you more in interest. Shortening the term of the loan 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 lifetime of the loan.
Either way, refinancing an auto loan should not negatively impact your credit scores, reports CarsDirect. Just make sure you go through a reputable lender so your old loan is satisfied (the new lender pays it off when it issues your loan). Then make full, on-time payments on your new loan.
What’s your experience refinancing a car loan? Have you found it worthwhile? Share with us in comments below or on our Facebook page.