by Amy Lillard
(1/23/2013) The idea of refinancing is a powerful one when you own a home, representing an opportunity to lower your interest rate and save hundreds or thousands over the life of a loan. But refinancing is not just for home loans - auto loan refinancing is also a great way to save money.
Refinancing a car loan works the same way as a home loan: you pay off your current car loan with a new, reduced-interest loan. Typically the reduced rate will mean lower monthly payments, and significantly less interest paid over time. That can mean paying off your loan quicker, and/or having additional money each month to use towards debt reduction or other expenses.
When should you refinance? If your credit score has improved since you purchased your car, you may be able to qualify for a lower interest rate than you initially procured. Also, if interest rates have dropped in the market and are lower than the interest rate you currently have on your loan, refinancing is a sound option.
Refinancing a car loan may take a little extra work than refinancing a home loan. If you worked with a mortgage broker with your home, he or she may routinely let you know fo opportunities to refinance. With a car, you'll need to identify opportunities yourself, and do the research to find a better loan. Thanks to online loan shopping, however, this can be a simple matter of looking at sites like eRate.com to identify different loan options and rates, all in one place.
There are a few things to remember when looking at refinancing:
• The earlier the better. Refinancing early in the life of a loan is much more valuable, as that's when you're paying the most interest. The earlier your loan is refinanced, the more money you save.
• Older cars may not qualify. In addition, lenders may limit refinancing options on cars as they age, as there won't be enough value in the car to justify the new loan. Cars that are worth under $10,000 may not be seen as worth the lender's (or your) time.
• There may be big fees. Some loans charge prepayment penalties, meaning that you may incur fees during the refinance. Depending on the fees, refinancing may be more costly than it's worth.
• There will be small fees. Refinancing will incur a few smaller fees, including a lien-holder fee and state re-registration fees. These are typically under $100, and won't significantly impact the loan.
Overall, auto loan refinancing can be a powerful way to reduce your loan and increase your spending power.
For Additional Reading:
Should You Refinance Your Car Loan?
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A frequent contributor to ERATE® since 2006, Amy Lillard is a freelance writer specializing in turning complex information into useful tips and tricks for readers. For questions or topic suggestions, contact Amy at [email protected].