How you can save money on your current loan
Eric Richko, a process engineer from Long Island, N.Y., faced a dilemma when he purchased a used car.
The dealership was offering a great deal on a preowned Jeep Cherokee, but only if he agreed to lousy financing terms. Richko decided to buy the SUV, but then he refinanced the loan with a credit union a few months later.
“It was actually pretty easy,” the 41-year-old Richko says. “When I had to refinance, I went to Teachers Federal Credit Union, and they took care of everything. They wrote a check to whoever handles Jeep’s financing and that was it.”
Richko ended up saving about $80 per month on his car payment.
If you’re stuck with an auto loan with a high interest rate, now’s a good time to refinance. Edmunds, an automotive information and research website, reports that rates for auto loans are among the lowest they have recorded in years. Some financial institutions are even advertising interest rates in the 2 and 3 percent range.
According to Experian, a major credit bureau, the average loan amount is $33,739 for a new vehicle and $20,723 for a used one. Refinancing an auto loan is easier and more common than you might think, Consumer Reports found in interviews with consumers and industry experts.
The reasons for refinancing include reducing monthly payments, as well as taking advantage of interest rates that are lower than they were when you first got the loan. Multiple experts said that dealerships tend to mark up in-house financing to boost profits. Often, there’s money to be saved, even if it just means lowering your rate a few points.
Personal finance platform Credit Karma claims that the average savings for members who refinance loans through its service is $3,000, or about $55 per month.
“Nearly half of Americans don’t have even $400 saved up for emergencies, so that small savings can be a big help to a lot of people,” says Amy Wang, associate director of Credit Karma Auto.
How good a rate you’re offered depends upon your credit rating, says Brian Moody, executive editor of Autotrader.com.
“You need to know your credit score, and be aware that those low- or zero-interest deals are for people with excellent credit,” he says.
Nicole Staton, 49, a systems analyst from New Jersey, had just finished dealing with Chapter 13 bankruptcy in 2014 when she bought a new car. After getting approved by her bank for an 8.6 percent loan, the dealership she bought the car from gave her a 6.9 percent loan—a lower rate, but still not ideal.
A year later, after her credit had improved, she was able to refinance the loan with a rate under 3 percent. Stanton saved $30 on her monthly payment while reducing the loan term by a month.
“It was a no-brainer,” she says.
Refinancing an auto loan is nowhere near as involved as refinancing a mortgage. Each state has different laws regarding auto loans, but in general, all you need is proof of ownership, proof of income, and maybe a form or two from the DMV.
“You can usually get it done in a few hours rather than the weeks it takes to refinance a mortgage,” says Alain Nana-Sinkam, vice president of strategic initiatives at TrueCar.
Naturally, There are a few things to consider before pulling the trigger on an auto loan “refi.”
Start by crunching the numbers. Consider where you are in the life of your loan. It’s better to refinance earlier when there are still a lot of payments left to make, assuming you can get a better interest rate. Refinancing late in the loan isn’t likely to make as much of a difference.
Ask your lender about refinancing your current loan. Compare their best offer with ones from your local bank or credit union, and online lenders, like those listed at Lendingtree.com and Credit Karma. You can also plug your numbers into a refi calculator to see how much you’re likely to save.
Be wary of lowering monthly payments by extending the loan term on an aging car. If you do that, you can end up paying more over the long run.
Lastly, if there are fees associated with refinancing, make sure they don’t cost you more than you would save.
“If the cost of refi exceeds the benefits you’ll receive from it, you shouldn’t do it,” says Wang.
Nana-Sinkam advises consumers to check with their lenders to make sure there aren’t any penalties for paying off a loan early or making extra payments. He says that such stipulations are rare these days, but every state has its own regulations regarding such things.
Assuming there are no roadblocks to refinancing, he says another good way to save money on a car loan is by making extra payments and paying off the principal balance early.
“It’s almost your own homegrown refi,” he says. “If you pay extra, you can accelerate the loan and avoid interest charges.”