Millions of homeowners have been able to make substantial savings in recent years by refinancing their mortgages. While the plunge in interest rates has displeased savers, it has proved to be a real boon for borrowers. The drop of around 3% in the mortgage rates in just the last four years or so has translated into fairly substantial savings for homeowners who have switched lenders and refinanced their mortgages. However, strangely until very recently, the same technique has not been applied by car owners even though typically the car represents the second-largest investment made by them after their homes. This has been due to the fact that a large number of car owners opt to replace their vehicles even before the original loan tenor is up and the loan paid off. Moreover, with the loss in value of cars being so quick, most cars are not an attractive proposition for refinance as their values are typically less than the amount of loan outstanding.
However industry reports suggest that car refinance is on the upswing with the number of applications rising by about 30% from that of just a year back. It is possible for customers to achieve real savings with even a modest interest rate drop as the cost of car refinancing is quite low when compared to mortgage refinancing.
Should You Refinance Your Car?
If you are paying a fairly high rate of interest on your existing car loan, you should definitely consider switching financiers to take advantage of the substantial drop in interest rates. By doing this you will be able to lower your monthly payment by quite a bit and you may very well be able to save a few thousand dollars by the time you pay up your loan fully. A common fact that is also typically ignored by customers that their credit scores may have improved since the time they had originally applied for the car loan and this may make them qualify for a lower rate.
For example a car bought in 2013 with a 60 month loan of $27,500 at 4.1% could be refinanced after the 24th installment of $508. You could get an interest rate of just 1.5% for 36 months on the loan balance of $17,170 making it necessary for you to only pay $488 per month. The total saving over the next three years would thus be $707, assuming there are no closing costs to be paid. As finance experts will tell you, you pay more interest in the first half of the loan tenor than the second, so the amount of savings is more if you refinance when the loan is still young. If the car loan described above had been switched after only 12 monthly payments and a fresh loan of $22,441 obtained for 48 months, you would have ended up paying $482 per month, saving you a total of $1,248 in four years.
Avoiding the Bumps and Potholes
To get the best out of your car loan refinance, you should make certain that there are no surprises hidden in the exit clause of the current contract or otherwise the benefits accruing to you could either dip substantially or even make the move unviable. Do not rush to get your loan refinanced – you can have a discussion with your current financier and you will be surprised that they could be amenable to lowering the rate if you have been a good customer. You also need to go through the terms and conditions of the refinancer as there could be restrictive conditions regarding the minimum amount of refinance, the age of the car or even the mileage it has clocked up. According to established lenders, the key to getting the maximum benefit out of the refinancing agreement is your credit score – obviously the better it is the better the terms and interest rates you will be able to obtain. You should also resist the temptation to extend the duration of the loan to take advantage of a lower monthly payment because the longer the loan tenor, the more interest you pay. Use the savings you are making to pay off the loan faster and get your financial freedom.
Author bio: Max Miller is a personal finance consultant working in one of the largest dealerships of certified pre-owned cars. A car enthusiast, he is a regular contributor of a number of auto portals of key customer concerns.
