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Time to Refinance Your Car Loan

Do you love your car, but hate your car loan? If so, now's the time to act. With interest rates falling, there's never been a better time to refinance your car loan.

Take a look at your existing car loan contract right now. Are you paying a high interest rate on a long-term loan? Does the loan carry an early payment penalty? If your interest rate is high, and there are no — or low — penalties for early payment, get ready to shop for a new car loan.

"One of the best-kept secrets today is refinancing your auto loan via the Internet," said Brian Reed, president of Capital One Auto Finance. "All it takes is the time to fill out the application — which is only about 10 minutes."

How much can you save? Say you bought a new car six months ago. And say there were a few dings on your credit so the dealer told you that your loan would be 11 percent on a 5-year loan for a $23,000 car. Your monthly payments are around $500.

Now let's say that you surf the Web until you find a company that offers auto refinancing. You could refinance the balance of your loan and lower your payments to about $400 a month. That's a savings of nearly $6,000 over the life of the loan.

Other examples could well be more dramatic. In some cases, a new car buyer could be stuck in a loan with an 18 percent interest rate. By refinancing at a competitive rate, the monthly payments would be slashed.

Capital One Auto Finance, which once loaned mainly to super-prime customers, was recently acquired by Capital One. As a result, Reed says, they can now provide refinancing for auto loans to a "broader spectrum of customers" including the sub-prime or what he referred to as the "underserved" class of borrowers.

Other lenders are also active in the refinancing game. Steve Herz, E-Loan Inc., vice president of consumer loans, said that refinancing "isn't necessarily a new thing, but the awareness of it is a relatively new thing. Now that term loans are longer, there is more savings when you refinance. I think it's becoming much more attractive."

Bankloan.com is still another company refinancing auto loans. On its home page, a flashing sign seems to reflect the feelings of many consumers: "Love your car, hate your car loan?" In a nutshell, this sentiment is exactly what moves people toward auto refinancing.

Capital One Auto Finance has been a leader in the online lending field since they started 1995. The first loans were put on the books in 1997, said Reed, and last year the company wrote $750 million in loans.

"So far this year, we're on pace to double that figure," Reed said. In fact, in October, Capital One Auto Finance was able to buck the trend of bad financial news by making $170 million in loans. He said that refinancing has grown to the point where it constitutes from 15 to 20 percent of the company's business.

Currently, Capital One Auto Finance is offering one of the lowest interest rates for refinancing car loans. Those with strong credit can refinance at 6.75 percent for loans up to 60 months long (see Capital One Auto Finance for current interest rates).

Online lenders, like Capital One Auto Finance and E-Loan, take applications over the Internet and give consumers a quote on the interest rate and a monthly payment. A line of credit is established and a "draft" — or check — is issued that can be used at a car dealership.

Reed points out that his company has given "people the ability to go into a dealership as a 'cash buyer.' Otherwise, once the salesman starts talking about interest rates and monthly payments, the customer comes out of the dealership with their head spinning."

Herz joked that, once the financing was in place, all the customer had to do was "concentrate on falling in love with the car."

So what kind of consumers should consider refinancing their auto loans? Reed has identified the four types and given them each a name:

"The Saver:" This type of customer is always keeping an eye on the Fed (Federal Reserve) and when interest rates drop, they begin shopping for a way to improve their personal financial picture.

"The Newly Educated Remorseful:" A car owner may have recently bought a new vehicle and financed it through the dealership. Then, a neighbor or friend innocently asks, "So what interest rate did they give you?" The car owner goes back to their contract and finds that the dealer made a pretty penny on them by marking up the interest rate several percentage points. Buyer's remorse sets in ... and the search for a new auto loan begins.

"The Budgeter:" This customer may have bought the car on a short-term loan — say two years. The payments are high but affordable. Now suppose this customer's economic picture changes — he buys a house, for example — and his monthly expenses shoot up. He looks at that auto loan and wants to spread the payment out over a longer period of time. Refinancing the auto loan is just the ticket to do that.

"The Lessor:" Many people are leasing their cars these days. Some find that they want to keep the car at the end of their lease. In some cases, the dealer is of no help establishing a loan. Doing a "buy out" — where the customer actually purchases the car and establishes a loan — is a smart move in this case.

Herz urged consumers to evaluate their current loan, and their potential savings, by using the calculator on E-Loan's Web site. Plug in the going rate for refinancing and generate a new payment. Now it becomes clear how much money reducing the interest rate can save.

As a test case, we called Capital One Auto Finance and asked for their best rate to refinance a $10,000 loan on a late-model used car. We were told that the loan could be financed (subject to credit approval) at 6.75 percent and monthly payments would be $307.65. The application was free and could be made online. However, there would be a $15 lien filing fee (it varies from $5 to $65 depending on which state you live in).

Another instance, which might deserve refinancing, involves the consumer who used to have shaky credit. After making 2 years of car payments on a 5-year loan, that consumer might now qualify for a higher credit tier and, thus, a lower interest rate on a refinanced loan.

An easy way to glimpse at current refinancing rates for auto loans is to visit Bankrate.com. By typing in the name of your state of residence and the city closest to you, a list of lenders and their rates are presented in an easy-to-compare table. The table also shows whether a fee is charged; contact information is given, too.

So, if refinancing is such a great move, why don't more people do it? Possibly, they anticipate the same kind of application-heavy process found in refinancing a home loan. It could simply be that people don't know it is possible. After all, the only risk is the 10 minutes it takes to fill out the application. Make sure, however, that no points are charged for the refinance process.

Remember, as the Federal Interest Rate drops, auto loan rates follow. Why throw that money away paying interest? Join the wave of the future and surf the Web for a good new auto loan.