You might
love your car, but what about that interest rate you are paying for it?
You may find that refinancing can make you love it all.
Once you have a stable job, a good history of making
loan payments on time and an improved credit rating, you could receive a
better interest rate. If you still don't have your credit in order, you
might not want to look into refinancing just yet. This is really something
that you should only do once on a vehicle.
If you have made all of your
payments on time, your lender may simply give you a rate modification. The
lender agrees to simply lower your interest rate. Call and ask. If your
lender is willing to reduce your rate, you will see savings with having to
refinance. This can save time and money.
Sometimes, lenders are unwilling to
do this. If so, start looking into refinancing your loan. Start with
reviewing your current loan documents.
Find out what your credit score is
by ordering your credit report. You are allowed one free credit report
each year from each of the three main reporting agencies.
You need to know whether or not your
loan charges any prepayment penalties. Some loans will hit you with fees
ranging from $25-$200.
You also need to know how your loan is calculated. Is
it based on simple interest? Simple interest means that you are charged
interest each day based on the balance you owe. What you want to know is
if your loan interest is calculated
based on the Rule of
78s. This can be a form of prepayment penalty.
The Rule of 78s means that the
lender will collect three-fourths of the loan's interest during the first
half of the loan. The earlier you try to pay off the loan, the more you
will have to pay. The higher the interest rate, the higher your payoff
amount. You aren't just paying off your principal, but the interest also.
Check the loan contract to see if it allows a refund or rebate of
interest. That will indicate that you've signed this type of pre-computed
loan. Most auto loans will not use this form of interest
calculation.
The best way to refinance is to take
a simple interest loan with no prepayment penalties and refinance into a
simple interest loan that has a lower rate. You have to shop around for
the best rates. They can vary from institution to institution.
Make sure that you check with your
local banks and credit unions. They can be very competitive in trying to
get your business. They also may work with you a little more on some
details of your credit history.
Watch out for the fees involved. Ask
the lender for a breakdown of all the fees and ask about each specific one
in detail.
If you owe more than your car is worth, you won't be
able to borrow at a perfect interest rate. This happens in most cases. The
lender will lend you enough money to pay off your existing loan. The loan
will only be partially secured by your vehicle, because it isn't worth
what you have borrowed. That makes the interest rate slightly higher.
If you are simply having trouble making your
payments, your lender might extend the term of your existing loan. They
aren't going to want to do it, but you should be able to show them why
they should. They know that it is better to restructure the
loan
than to have you default on it.
There are some things you should
watch out for when refinancing your car loan. For example, if you are in
the market for a mortgage, it isn't a good idea to start making changes
that will show up on your credit report. Wait and do it after your
mortgage is secure.
Refinancing means that you will
often be paying for the vehicle longer. This can totally destroy any
interest savings you are incurring. Plus, your vehicle is depreciating
every day. In three years, do you still want to owe more than it is
worth?
Don't fall into a loan with
prepayment penalties. Stick with loans that are computed based on simple
interest. You can pay off your loan faster and more conveniently. You only
want to pay interest on the current principal amount, not the amount of
the total loan.
Do the math and decide if in the
long run this is best for you. What seems good at first really isn't.
Factor in the value of your car now and in the future. Make certain that
you are saving
money.
