Auto loan refinancing can lower cost, but not for everyone

Posted: Friday, February 22, 2002

NEW YORK (AP) -- As the Federal Reserve cut interest rates last year, thousands of Americans rushed to refinance their mortgages. Less known is that many also began refinancing other debt, including auto loans.

It doesn't work for everyone, but if you can get a lower interest rate without lengthening the term of an auto loan, then refinancing can lower your monthly bill and cut your overall costs as well.

That's what happened with Joe Powers, 29, an analyst for a California credit card company.

When Powers bought a used 1997 Ford Explorer for $18,000 three years ago, he had just $5,000 for a down payment. The best interest rate he could get on his 60-month auto loan was 12 percent.

''That seemed like an outrageous amount of interest,'' Powers said. ''But I just didn't have more than that to put down.''

In January he refinanced his sport utility vehicle at His new 36-month loan carries a 7.99 percent rate.

''It's saving me about $50 a month, or close to $2,000 over the life of the loan,'' he said.

Chris Larsen, chief executive of E-Loan Inc., of Dublin, Calif., said his company has seen a steady increase in auto refinance applications.

''We believe consumers are looking at their debt as they do their assets, and they want to manage their debt portfolio,'' Larsen said.

Loans for cars, vans and trucks are prime candidates for refinancing ''because it's not uncommon these days for people to have a $30,000 or $40,000 car loan,'' he said.

Larsen said a family that refinances a $20,000 to $30,000 auto loan in the 8.5 percent to 9 percent range can, if it has good credit, qualify now for a rate as low as 6.75 percent. That would result in $1,500 to $2,000 in interest savings over the life of the loan, he estimated.

In most cases, no appraisals are required because lenders depend on values listed in the Blue Book, the used-car guide. Borrowers do generally have to pay a title transfer fee of $15 to $30.

One way to avoid ever having to refinance is to shop for a good rate in the first place.

Robert Gentile, manager of auto price services for Consumer Reports, said auto buyers should get two or three different quotes from credit unions, banks or other institutions in advance.

''The temptation is to opt for dealer financing, but that may or may not be the best deal,'' he said.

Later, if a decision is made to refinance, consumers should make sure their loans don't include a prepayment penalty and that there are no fees ''that would eat up any benefits of refinancing.''

Greg McBride, a financial analyst at in North Palm Beach, Fla., said consumers should do some calculations to determine if they'd save money with a refinancing.

It might not make sense, for example, if you get a lower rate but have to extend the term, he said.

''If you've got 2 1/2 years left on your loan and you get a lower rate but extend that to 3 years, you'll likely offset anything you save on interest with the longer payment schedule,'' McBride pointed out.

You also shouldn't consider refinancing if you intend to sell the car soon, he added.

So where can it work?

''Someone who bought a car a year or two ago with no established credit and got a high rate might now qualify for a lower, prime rate,'' McBride said. ''Or someone who bought a new car at 12 percent could qualify for a used-car rate of 7 percent.''

One example: A family that bought a new car and took a $30,000 loan for 60 months at 8 percent interest would be paying $608 a month. A year later, the roughly $25,000 balance refinanced for 48 months at 6 percent would reduce the monthly payment to $587 and save more than $1,000 over the life of the loan.


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