Refinancing Auto Loans

Richard Barrington
LoanBiz Columnist

The news is full of advice about refinancing mortgages, but auto loans may also present a refinancing opportunity. With interest rates falling, car owners may want to look into lowering their car payments by refinancing their auto loans. While car owners shouldn't expect auto loan interest rates to have fallen as dramatically as Federal Reserve rates (down 2.75% since last August), there is a good chance that they can find an auto loan interest rate now that will save them some money on their car payments.

Reasons to Consider Refinancing

Actually, there are a few reasons why car owners with auto loan balances should consider refinancing:

• As noted, interest rates generally are falling. Different interest rates are influenced by different variables; for example, auto loan interest rates don't necessarily move with Federal Reserve rates because they are granted for longer periods--and auto lenders have to consider credit risk. However, interest rates have been falling across the board, for loans of all durations, so this bodes well for auto loan interest rates.
• Another reason for car owners to consider refinancing now is if their credit rating has improved. Auto loan interest rates depend in part on the credit rating of the borrower, and if that rating is higher now than when the auto loan was originated, it could qualify him or her for a more competitive interest rate.
• A third reason for car owners to consider refinancing their auto loans is to avail themselves of the opportunity to shop around. Very often, car buyers just let the dealer arrange the financing, and not surprisingly some dealers treat buyers in that situation like captive business. Letting lenders compete in the refinancing process can result in a lower interest rate.

Road Hazards

While conditions may be good for refinancing an auto loan, borrowers should still look before they leap. In particular, they will want to

• Make sure credit hasn't deteriorated. Again, credit rating affects interest rates, so borrowers whose credit rating is worse now than when they originally borrowed may be better off with the loan they have.
• Watch out for repayment penalties. Some loans impose penalties for early repayment. This doesn't necessarily make refinancing impossible, but the amount of the penalty would have to be factored against the savings on car payments.
• Be wary of lengthening the term of the loan. It's easy to lower payments by lengthening the repayment period, but unless there is reason to believe the useful life of the car has gotten longer this might not be the most prudent strategy.
  

Source:
Federal Reserve

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.