Refinancing your vehicle loan could save you a few thousand dollars, and could be easier than you think. The average five-year new car loan rate is 3.72% as of Tuesday, according to the Informa Research Servicesโ Interest Rate Review. If youโre paying more than that, you should definitely take a few minutes to see if you can do better. But even if youโre paying less, you may still be able to lower your rate even further.
Refinancing can not only save you money on interest, but with a lower interest rate, more of your payment goes toward paying off your principal balance. And that reduces the time that you may be upside down on your loan, owing more than the vehicle is worth.
Phil Reed, senior consumer advice editor for Edmunds.com, one of my favorite sites for car buying information, recently joined me on Talk Credit Radio to share tips for refinancing your vehicle. Following is an edited excerpt from that interview.
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Phil, how does someone refinance the loan on their car or truck?
First of all, itโs a lot easier than most people realize. When we think refinance, weโre always thinking about our home mortgage. Iโve actually refinanced (my home) several times and thatโs like a two- or three-week period with lots and lots of documents.
Refinancing a car is much simpler than that, and itโs very beneficial to people who perhaps have higher interest rates than what they actually wouldโve qualified for. Itโs not uncommon for that to happen. So thatโs one scenario. Another possibility is that their credit score has changed quite a bit since they purchased the car and so then they qualify now at a much lower rate.
So basically it almost sounds like magic but itโs a way to drop your car payment and also adjust exactly how long you want to keep paying for that new car.
Whatโs the typical length of a car loan today?
The most common loan period for purchasing a car is five years. Unfortunately, lending institutions have gone to six and seven years and we donโt recommend that. Anything up to five years is good to purchase a car. That seems to be a comfortable amount of time where the payments are low enough and the car retains its value. If somebodyโs considering leasing, we recommend leasing for no longer than three years.
[Related Article: How Does Paying Off a Loan Affect Your Credit Score?]
Phil, you described a scenario in which someoneโs paying a higher interest rate than what they may have qualified for. Give us an example of how that might happen.
In some cases, particularly people who have mid-tier credit, they are nervous about their credit. In a lot of cases theyโre in a little bit of denial; either that or they donโt want to really face up to it. And oddly enough, they always seem to anticipate that (their credit) is worse than it might really be. So what happens is they go directly to the dealership without checking their credit scores โ which is not a good thing to do โ and their attitude is โget me done.โ In fact, thatโs sort of a slogan that some car salespeople use; this (customerโs attitude) was just โget me done.โ
And that means that the borrower almost feels that the dealer is doing them a favor by giving them a loan. If they had taken time to check their credit, they might have found that they were in a stronger position. However, what happens is the dealership will go ahead and possibly offer them a loan thatโs 2% to 5% higher than it could be. Now, in some states itโs regulated so the markup could only be so much.
But even two percentage points on a $25,000 loan is going to mean nearly $1,000 to $2,000 more over the term of the loan. Not only that, but these days interest rates are very low if you finance properly through the dealership. Sometimes you can get below-market rates. So there is a lot of money to be saved in financing a car the right way.
Where should someone go if they want to refinance a car loan?
Well, the first step of course would be the Internet to do the research. In a lot of cases, there are some sites that are aggregators that pull all of the rates together such as Bankrate.com. There are a lot of online lenders that have gotten into the refinancing business.
The major banks will also refinance but sometimes it seems their rates are not really quite as good. Now, obviously if your first loan is through a dealership, youโre not going to be able to refinance through them. They wouldnโt rewrite their own loan so youโre going to have to go outside of that. But some of the loan application processes are really just a matter of a 5- to 10-minute application online and you get your results right away. The contracts are fairly simple and in every case Iโve ever known, thereโs no prepayment penalty.
So you might as well shop around and see what you can do to lower your rate.
Itโs always a good idea to know where you stand financially. It puts you in a much stronger position and also itโs psychologically good to face the truth.
Want to hear the full interview? You can download the interview with Phil Reed, listen online, or listen on iTunes.
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Image: Caitlin Regan
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