Four Clear Signs That It’s Time to Refinance Your Auto Loan

by Guest Contributor · 10 comments

Getting an auto loan is a bit like investing in the stock market—it’s all about timing. But when you need a new car, you often don’t have the luxury or flexibility to bide your time until the market is just right. Luckily, you can still cash in on good deals when they appear by refinancing your auto loan. Car loan refinancing lets you pick the right time to lock in low interest rates so you can save money in the long run. Here are four clear signs that it might be time to consider refinancing your car loan.

1. You Got Scammed by Auto Dealer Loan Markups

Get this—if you got an auto loan directly from your dealer, they probably tacked an extra 1 to 2 percent onto your interest rate. It’s called an “auto dealer loan markup” and it’s completely legal. The rationalization is that it’s akin to a finder’s fee. The dealer does the lender the service of finding a borrower, and for his trouble, they get to split the profits for an additional markup he adds to the interest rate you would have qualified for if you had secured your own financing. The lesson: convenience can be costly. How costly? If you were to get a 5 year auto loan for $20,000 at 10% APR, you’d pay $424.94 a month without markup, for a total of $25,496.40. But if the dealer tacked on his extra 2% as a markup, you’re looking at monthly payments of $444.89, for a total cost of $26,693.40—a difference of $1,197, just for the service of finding you a lender. You can do better.

2. Your Credit Score Has Improved

Late payments, loan denials and other adverse items on your credit reports are like sandbags on your credit score. And just like a hot air balloon, your credit score will rise once those sandbags are shed. Let’s say you bought a car 6 years after you declared bankruptcy. One year into your auto loan, your bankruptcy will have expired from your credit report, which could boost your credit score by several points. After passing this threshold, you may be able to qualify for a lower interest rate, thus saving you hundreds of dollars in the long run with an auto loan refinance.

3. Interest Rates Have Dropped

Our economy is inherently boom and bust. So, unless you bought a car when the federal funds rate was at an all-time low, it’s just a matter of time before the fed rate drops below what it was when you originated your auto loan. Determining if the federal interest rate has dropped is incredibly easy—simply visit FederalReserve.gov and look at the historical data. Look for the year when you bought your car and compare it to today’s rate. Actually, you probably won’t even need to do this, since a drop in the fed rate is often hot news. Of course, the fed rate doesn’t directly affect auto loans—but experts say that the effects of cheaper credit trickles down to auto loans within about months of the federal interest rate being cut.

4. You Can Get a Better Deal

This last sign may seem a little overly Zen-like, but it’s true: one of the best ways to see if you can get a better deal by refinancing an auto loan is to see if you can get a better deal with a refinance. The fact of the matter is that it’s faster and easier to crunch the numbers to see what kinds of interest rates you’d qualify for than it is to check your credit history, track the fed rate or call up your dealer and grill him on how much he ripped you off two years ago. You can get auto loan refinance quotes from multiple lenders instantly via online bidding and get concrete numbers on how much you can save.

This is a guest posts from the folks at MoneyAisle, an online resource where consumers find great rates on auto refinance loans. MoneyAisle runs live, reverse auctions (like a reverse eBay) for consumers shopping for financial products. Consumers get exclusive rates and instant one stop shopping in a fun, dynamic auction format, and banks and Credit Unions get inexpensive access to new customers, accounts, and loans.

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{ 10 comments… read them below or add one }

retirebyforty November 5, 2010 at 7:30 am

Really? I didn’t know you can refinance auto loan. I got mine from the bank last time, it’s probably time to check if there is a better rate out there.

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Megan @MoneyAisle November 6, 2010 at 8:22 am

Yes. Refinancing an auto loan is actually much simpler than a mortgage refi. Some people refinance within the same day they apply.

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Jenna November 5, 2010 at 1:18 pm

I never knew you could refinance an auto loan, but then I’m not a big fan of auto loans to begin with.

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Steve Jobs November 5, 2010 at 7:45 pm

I didn’t know that auto dealers do have a markup on your loan. They already a profit for the car you are buying and yet for a simple service of passing you unto lender they still get money from you? They are making a killing just for talking you to get a car and a loan.

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Ben@BankAim November 6, 2010 at 5:24 pm

Its definitely time to refinance my auto loan. Rates have fallen since 2008 and since I still own $28k I think its a good time to refinance. Wouldn’t have thought of this until I read your article. Thanks.

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Doug @ CheapScholar.org November 8, 2010 at 2:02 pm

Everyone always talks about refinancing their home but no one ever seems to think that you could do the same with your car loan. My guess is that most credit loans will beat any interest rate that someone might have gotten locked into from a traditional bank at the time of closing the deal on the car at the car dealership.

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Megan @MoneyAisle November 8, 2010 at 2:08 pm

You’re right. Most people don’t realize the mark-ups involved and a refinance can put all that money back in your pocket.

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Dan@ BankVibe.com November 11, 2010 at 4:58 pm

So how much would I save if I refinanced my auto loan. I bought the car June 2009 with an interest rate of 6.9%. Finance amount was $37k and my monthly payments are $610 for 75 months. I currently owe just under $28k. Just curious how this would save me money, especially if I had to extend my term, sure I would save money but how much extra would it be costing me in interest?

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autorefinancereview.com November 11, 2010 at 5:02 pm

Great post. Getting dealer financing almost always results in getting a rate that is too high, since the dealer sells the loan to financial institutions and takes a cut. Anyone with dealer financing should try to refinance their loan.

One thing to consider: make sure that your car can be refinanced. Most lenders have vehicle specifications related to age, mileage, car-type, make/model, etc… Usually cars less than 7 years old with 80k miles or fewer can qualify.

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Mark November 24, 2010 at 9:12 pm

Good tips. I think that you can refinance an auto loan as soon as eight months after you buy the car. You just need to make sure that you make all of your car payments on time for that time period.

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