Auto Refinancing Can Save You Cash

By Larry Patrick

Car loans work just like mortgage loans—if your rate is too high, you can refinance for a great opportunity to save money. Inching down a loan’s interest rate even a percentage point or two, say from 8.9 percent to 6.9 percent, can lower your monthly payments and save hundreds of dollars in interest over the life of the loan.

Unlike home mortgage refinancing, a vehicle refinance can lower your loan cost without incurring a trunk-load of fees; there are no application fees, no down payments and no closing costs. However, make certain your existing loan has no prepayment penalties.

Here are examples of how vehicle refinancing works. If you bought a new car last year and financed $30,000 for five years at 6.75 percent, it would result in a monthly payment of $591. If, after one year, you refinance at 5.49 percent, your payment would drop to $576 a month—saving you more than $720 over the life of your loan. Even refinancing a $16,000 loan after one year—dropping from a 6.75 percent APR to a 5.49 percent APR—will save you $368 over the life of your loan.

Want to save even more money and pay off the loan early? After refinancing to reduce the payment, send in what you’ve been paying all along. By reducing the principal much more quickly, you multiply the benefits of refinancing.

Refinancing a car can be a simple, moneysaving process—even more so for consumers going online for their deal. According to Forrester Research, two-thirds of those who have applied for auto loans online say it’s more convenient than on the phone or in person. Plus, the savings online can be significant.

AAA Going Places’ On the Money editorial provides a forum for personal finance and investment information and ideas. The article should not be construed as investment advice. An investor’s best course of action must be based on individual circumstances.