Auto Loan Refinance Made Easy

It you have a car loan you might be able to save big bucks by completing an auto loan refinance . This is also one way to pay off your car loan early. Of course, before you take action it’s very important to confirm that it’s worth your time and that you will get the very lowest interest rate possible. Here are 4 easy steps you can take to accomplish this:

Step 1 – Make sure it’s worth your time.

Before you spin your wheels make sure the time and expense are worth the savings. You figure this out by comparing the total amount you are about to save by refinancing your car loan over the life of the loan. Then you subtract the expense of refinancing.

Let’s say you have a 3-year car loan at 5% with a balance of $10,000. Assume you have the option of refinancing the loan at 3%. Is it worth it to refinance the car loan? (To keep things simple, let’s assume both loans are non-amortizing. That means you pay interest only during the life of the loan and then pay off the principal. Most car loans don’t work this way but I want to illustrate the concept first. Later we’ll compare self-amortizing loans.)

Using this simple interest example you would save $200 a year by refinancing the car loan. And since the loan is due and payable in 3 years, you will save $600 over the life of the loan. If it costs you less than $600 in expense and time, it’s worth it to refinance. If it cost more than $600 to refinance, it’s not worth it.

If this is an amortized loan, it means that your payments are greater because they include principal and interest. But it also means that once the 3 years are up, you won’t owe any more money. You can compare amortized car loans by simply taking the amount of each payment and multiplying them by the number of payments you have to make. Then, you simply compare the two numbers to see the total cost of each loan.

For example, assume your existing loan calls for payments of $314 a month for 36 more months. Further assume that you have a chance to refinance that amortized loan. Option “B” is to pay $214 a month for 4 more years. Also, if you opt for the refinance, it will cost you $600 in fees. Here’s how you compare the two:

Under your existing loan, your payments total $11,304 over the 3 year period. If you refinance and pay $214 for 4 years (plus the $600 in upfront costs) your total payments will be $10,872. The refinance is a good option for you. Let’s go on to the next step.

Step 2 – Auto Equity

Check with Kelly Blue Book to see if the balance you owe is greater than the net equity. If you do owe more than the car is worth, you’re going to have to pay down the balance in order to convince a lender to refinance your loan. Can you come up with the difference? If so, go to step 3. If not, don’t waste your time any further. Instead, focus your efforts on never having a car loan ever again. You’ll save a lot more than by simply refinancing.

Step 3 – Get Your Data

In order to give you a rate, lenders are going to have to review your credit history. That being the case, you should inspect your own credit file. This way, you’ll know what to expect when you speak with lenders and you can clean up any credit report mistakes yourself.

The good news is that you can actually get your own free credit score without using a credit card or signing up for a “free trial”. Take advantage of this free service so you can make sure the credit score your lenders review is accurate.

Step 4 – Shop

You can shop for alternatives to your current auto loan by touching base with banks and credit unions. If you have a car loan with a very high interest rate, you might even consider taking out an equity line on your house to pay off the car loan or go to Lending Club to see if they can fund your wheels.

Many times people want to refinance because they can’t afford the payments they are making. As a result they get roped into extending their loan. Even though the rate might be lower, the extended period and costs to refinance means they might pay more out of pocket over the life of owning the car.

The real problem people usually face isn’t a car loan with a rate that’s too high (although you auto loan’s rate may indeed be too high). The real problem is cash flow and overall spending. Soon I’ll discuss how to save a tank full of cash by never having a car loan in the first place. Stay tuned…..

Have you ever looked into refinancing your car loan? Did you end up doing it? Was it worth it?