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    Refinancing your auto loan could save you a bundle (TheTruthAbout..., Flickr).

    by: Gary Hoffman | AOL Autos
     

    In a time of tight household budgets, consumers are finding they can improve their monthly balance sheets with a little known type of loan: Refinancing an auto purchase.

    With interest rates still low and loan money starting to flow again, it is possible to say goodbye and good riddance to high interest rates in your original contract. In some cases, this can deliver hundreds of dollars a year in savings. Best of all, the credit scores considered acceptable for a good rate have been trending downward, making the option viable for even more consumers. Especially good candidates for refinancing include those whose credit scores have risen since they took out their initial loan.

    “If you have worked on your credit over time, and you have been able to go from a near-prime to a prime customer in a year or two, you would obviously warrant a better rate,” said Gary Pierce of LendingTree Autos, an online clearinghouse for consumer car loans.

    Near-prime customers have credit scores in the mid-600s, and prime customers score at 680 or above. The scores are based on the so-called FICO score, a measure of creditworthiness developed during the 1950s and widely used in the financial industry.

    With a credit score that’s risen from the low 600s to the high 600s, you could conceivably go from a nine percent rate down to four or five percent. A four-point decrease for a car valued at $20,000 could cut payments about $40 a month -- or $2,400 over a five-year contract. Savings would be even greater if you shortened the term of the loan, from 60 to 48 months, for example. The monthly payment might not go down in that case, but a car owner would save hundreds of dollars more on the total cost of financing.

    Another factor in favor of refinancing is that the financial climate is better than it was 18 months ago. So people are generally qualifying for lower interest rates than they did then. A score in the high 600s might get you a competitive interest rate of 5 percent today. At the depths of the financial crisis, you might have needed 720 for those rates. Other factors may come into play as well. Car buyers might have been saddled with an uneconomical loan when they first bought the vehicle. If they negotiated a great price on their car, the dealer may have managed to squeeze out a nice profit on the financing end.

    “At the dealership, you are not necessarily going to have your cake and eat it too,” Pierce said. “You are not likely to get the best rate and the best price.”

    Either way, the time is right to undo the damage. Traditional banks and online lenders are returning to the auto market, and they generally like refinancing customers, Pierce said, because these borrowers have a clear track record for lenders to evaluate. “They are considered good risks,” he said. “These are consumers who have proven they can make payments.”
     
    Consumers are warming to the idea, too. About 20 to 25 percent of LendingTree auto loans are currently refinancing contracts, Pierce said. Capital One, one of the more active refinancing lenders, offers rates as low as 4.84 percent for vehicle refinancing and handles loans between $7,500 and $30,000, on vehicles no more than seven years old.

    Some financial institutions have made refinancing as easy as possible, with online applications and answers back in as little as a day. Jeff Ostroff, the owner of the CarBuyingTips.com Web site, recommends credit unions if car owners have a hard time finding a bank willing to make the loan. But he warns that consumers should be wary of deals requiring extra payments. There shouldn’t be any penalties for prepayment either.

    “You are going to get all these things in the mail from companies who say they can get you refinanced,” he said. “You want to make sure there are no upfront costs.”

    But consumers still have to lay the groundwork. If your credit score was a problem when you bought your vehicle, you should pay special attention to paying bills on time for up to two years before trying to refinance. Obtaining a copy of your personal credit report -- before applying for refinancing -- is a necessity. This way you can be sure that it does not contain any errors and reflects any progress you have made on your creditworthiness.

    When refinancing, you want to be careful not to get “upside-down” on the loan, Pierce said. “Upside-down” means you owe more on the principal of the loan than the vehicle is worth. Consumers might already be in that uncomfortable position if they put too little money down in the first place. To make matters worse, if you have chosen a 60- or 72-month contract, your car may depreciate faster than you are paying down the debt.

    “If you do one of those long, stretched out loans, very little of your money goes against the principal at the start,” Ostroff said.

    This comes back to bite you when the time comes to sell the car. Owners could end up in roughly the same shape as millions of U.S. homeowners who are currently underwater on their mortgages. In this case, to sell your vehicle you have to cover the difference between the amount owed and its market value. This sum can run into the thousands of dollars.

    Ostroff recommends that consumers put 20 percent down when they make a vehicle purchase and keep the length of the contract as low as possible. “We tell people not to finance their car for more than 48 months,” he said.

    Even if your credit prevents you from refinancing, Ostroff recommends doubling up on payments if you can afford to, or at least paying more than the minimum due. This will reduce the cost of financing the vehicle over the long haul.

    It helps to keep in mind that even the most stylish, upscale luxury car is a liability on your personal balance sheet.  “A car is a hugely depreciating asset,” Ostroff said. “You are down 20 to 30 percent in the first 12 months.”

    But by managing the financing end well, you can make real assets -- like your savings account -- shine all that much brighter, which can lower the cost of owning a vehicle the next time around.

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    1 - 11 of 11 Comments
    hveshdon Nov 01, 2010 5:57 PM
    So I am new to the game, in terms of bad credit auto loans, and now that my credit is on the up and up, is it a good time to refinance? How long should I go before I look into refinancing? www.newstartautoloans.com
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    joelizak Jun 05, 2010 7:40 PM
    Refinance on a auto loan? Refi on your house, refi on your boat, refi on your dog, refi on your wife. I have news for you, the whole American population is brainwashed into thinking being in debt with a super FICO score is seventh heaven. Well it's not. Let me tell you debt peons what to do, because our government leaders won't . They want you in debt. Step one, never be desparate for a car because that's when you make bad decisions. Drive around a clunker for 2 years and save 200 dollars a month for your next car. When you have 5 thousand dollars in the bank, read the classifieds for private party car sales. Take a ride through the neighborhood block by block looking for cars with for sale signs on them. See a car you like but has no for sale sign, knock on the door and ask the owner if he wants to sell his car. You will be amazed what deals you can make. Last week I could have bought a mint condition 1995 Ford F-150 XLT with a camper shell for 4,000 dollars and the truck had only 25,000 miles on it! That truck will last another 200K miles easy. Step number two. As soon as you buy a super car for 5,000 dollars imediately start saving for your next car. That's right, $200 in the bank every month in a savings account. Then in two years you have enough for "your second car". This is the key! Always have backup! That way you're never desperate. Just like having two pairs of good shoes, alternate the driving of the cars back and forth so you put only about 8 to 10 K on each per year. That way both cars will last 15 years together. If one breaks down, no problem. Use the other car for a week until it's fixed. AND, now that your not desperate you can repair your car thriftely. Also if you're a good driver never buy full comprehensive car insurance. I insure my 3 cars for $450 per year, that's total ! Never ever buy a new car simply because you can afford "a payment". If you must buy a new car, you must be able to make it last 12 years or more nearly trouble free for it to be worth it. If your car is priced at 25K at the dealership, barter with the salesman to $18,352 and don't budge. When he pesters you about how your going to pay for it just be vague. "I'm not sure", tell him. But you know full well how your going to pay. You use your own bank, and get the lowest APR before you go out. You pay half the car in cash, and finance the the rest at your banks super rate of 2.3% interest. Mostly though the greatest deal is to buy a strong, reliable, economical car with 50,000 miles that's 5 years old for about 4 or 5 thousand dollars. Then do the same thing again. Then your all set, you are now saving money and have no car payment.
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    taterbugbanner Jun 05, 2010 6:54 PM
    Screw ford credit,and Grindstaff Ford(now they have quit dealing chevys) My message to them is "Fornicate thou,and thine equine that carrieth thou here"
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    taterbugbanner Jun 05, 2010 6:50 PM
    Well,I got screwed. I Bought a 05 Chevy,and now they tell me my interest rate is 22%. The saleseman told me I could refinance in 6 months,and I called after 6 months,guess what,they said the salesman had done moved on ,and they could not help me. This was Grindstaff Chevrolet in Elizabeththon,TN.
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    geoffnich Jun 05, 2010 6:16 PM
    If you have proven yourself to be one of the stupidest persons in the universe and bought a new, high-priced SUV with dealer financing because your ego was writing checks your body couldn't cash, the only way to redeem yourself is to pay off the loan or, if you can't because you were a truly gigantic idiot in the first place, sell the darned thing and buy a cheaper used car with cash that you CAN afford. In the long run, you will save tons of money and not be overly leveraged.
    Report This
    geoffnich Jun 05, 2010 6:05 PM
    Better yet, buy a good used car with ******** will save you much more than any other scheme with the exception of not buying the car in the first place. New cars depreciate, big time, as you drive them off the lot. Used cars can be purchased at the depreciated value. Loans for cars that depreciate faster than the principle value of the loan are the stupidest waste of money on the planet. No, the universe.
    Report This
    texasmike707 Jun 05, 2010 5:28 PM
    I pay cash for the car. Save up and buy it. I buy Hondas. The ones I have had only required standard maintenance .. about $1000 for the life of the car (4 years is when I trade). Also, I don't think the mid 600's is a great fico score ... at best ok ( http://www.bad-credit-advisor.com/fico-credit-score.html ) - 700+ would be really good. But it doesn't matter at all if you pay cash,...but it will for insurance.
    Report This
    archerandlion Jun 05, 2010 4:53 PM
    Another way to save $ is to increase your deductable on your collision insurance. Most people have $200-$250 deductable. Assuming you don't get into an accident every other year you could save a lot of $$ over the long term. You would probably save $250 in three years which you could put aside in case of an accident. After ********* your $$ in your pocket instead of the insurance companies pocket. Ask your agent & do the math. If you have enough cash to be able to come up with $1000 for an accident, go for $1000 deductable. You'll be surprised how much your premiums drop.
    Report This
    johnpaul49 Jun 05, 2010 4:42 PM
    What a stupid article ! when are people going to learn to pay CASH for cars ??
    Report This
    danielhls4 Jun 05, 2010 3:37 PM
    This article is misleading and not realistic. First, if you bought a car 3-5 years ago interest rates for most people were anywhere from 0-4% for qualfied buyers. If you can find any bank or credit union to refiance your loan for less please let me know. Now if you were sub-prime during the same time period chances are your credit hasn't improved. Also, you are no longer financing a new car but a used vehicle with miles and age; expect a higher interest rate than what you already have. Moreover, the recomended financing term in the article of 48 months and 20-30% down is not realistic for most people and just a bad idea. For example, if you purchase a new vehicle for $20,000.00 you would have to put down $4000.00(20%) to $6,000.00(30%) and at a 48 month term with a 4% interest rate your payment would be roughly $402.00(20%) - $357.00(30%) assuming a 4% intereset rate. If you select a 60 month term(interest rates do not change from 48-60 month contracts). and use $2,000.00(10%) down your payment will fall near $360.00 a month. Also lets not forget that vehicles are not assets because they do not increase in value. Moreover, see if your state has any prepayment penalties on auto loans; if not keep the money in your savings account and use as little as possible down. To conclude, refinacing a auto loan is a bad idea for the consumer but a great idea for banks; please don't drink this koolaid.
    Report This
    ja10ant Jun 05, 2010 3:08 PM
    where can i get a refinance on a cart and buggy which is what my car is worth?
    Report This
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    With interest rates still low and loan money starting to flow again, it is possible to say goodbye to high interest rates in your original auto loan.
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