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7 tips for refinancing an auto loan

Posted by  on Dec 15, 2014
 

By now, you are probably aware that historically low mortgage refinance rates have created an opportunity for millions of Americans to save money. But were you also aware that you might have a similar opportunity on your car loan?

Refinancing a car loan may not be as common as refinancing a mortgage, but any time there is a significant drop in interest rates it is a possibility worth considering. Here are seven things you should remember when looking at refinancing your car loan.

  1. Don't overlook the interest rate opportunity. Car loan rates did not drop as quickly as mortgage rates, but they did follow eventually. According to Federal Reserve figures, the average rate on a 4-year car loan was 6.72 percent at the end of 2009, but had dropped to 4.16 percent by the third quarter of 2014.
  2. Compare mortgage rates with auto refinance rates. A new auto loan is not the only way to refinance your car. If you are a homeowner, the cheapest way to do it might be through a cash-out refinancing or home equity loan. Mortgage refinance rates are typically lower than auto loan rates, though the gap has narrowed in recent years.
  3. Shorter loans typically mean lower rates. Not only have interest rates fallen sharply in recent years, but you can enhance these savings by shortening the term of your loan. If you are a few years into your original car loan, you may be able to afford a shorter loan which would carry a lower rate.
  4. Define your priority: lower monthly payments or reducing interest expense. Speaking of being able to afford a shorter loan, the length of the loan you choose may depend on your primary reason for refinancing. If you want to lower total interest expense over the life of the loan, a shorter term may be the way to go. However, if you are looking to ease your monthly payments, a longer-term loan may be better suited to your needs.
  5. Compare the length of your loan to the useful life of your car. Whatever loan term you are considering, be realistic about how many years your car has left. You do not want to get in a situation where you still owe on a car you no longer have, and ideally the car should outlive the loan so you can start saving for the next one.
  6. Consider trade-in possibilities. Since you would be getting a new loan anyway, consider whether it would be best to start completely fresh by trading into a newer model -- especially if you could save additional money by downsizing your car and/or getting something with better gas mileage.
  7. Shopping around makes a difference. Like many people, you may have gotten your original financing through the car dealer, just because that seemed the most seamless way of doing it. However, you'll find that when you are open to choosing lenders, you can save money by shopping around.

This is an era of low wage gains and meager interest rates on savings accounts and other financial assets. If you want to make room in your budget to save more, the best way to do it may be to actively manage your household finances by being alert to things like opportunities to refinance a car loan.

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