Many people have taken advantage of refinancing their home
mortgages since interest rates have dropped. However, many have
overlooked auto loan refinancing. It may be one of the best-kept
secrets around for saving money.
Many people have taken advantage of refinancing their home mortgages since interest rates have dropped. However, many have overlooked auto loan refinancing. It may be one of the best-kept secrets around for saving money.
Auto loan refinancing is like refinancing your home mortgage, though it typically involves less paperwork. After you find a lender who offers a lower interest rate, your new lender pays off your existing loan and you begin making payments on the new loan. If the payment amount is the same or higher, you’ll be able to pay off the loan earlier. If you pay off the loan over the same remaining number of months, your monthly payment will be lower. Either way, you should save money.
Suppose you borrowed $25,000 for five years at 9.5 percent to finance the purchase of a car. Your payment under these terms is around $525 per month. After one year, your loan balance is approximately $20,900, and you have four years of payments remaining. If you refinance the loan at 5 percent over four years, your new payment will be around $481. You’ll save around $44 per month or $2,112 over the remaining four years.
The earlier in the loan term you refinance, the more sense it makes. You’ll save more money and your car’s value will not have depreciated as much. Lenders will not lend more than the value of the car.
Check several lenders to find the best terms and be careful of hidden charges. Also, check your existing loan agreement for early payment penalties.
Mary Hubbell is a partner with the accounting and business consulting firm of Bianchi, Lorincz & Company located in downtown Hollister.
