Recently, in a matter of minutes, Sandy did what most people never think of doing: she refinanced her $15,000 car loan and lowered her rate from 3.99% to 2.99% — and her payments along with it.
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“My credit union wanted my business,” said Sandy, who was living off her severance package at the time.
Just as millions of Americans refinance their homes to save serious money, you may be able to refinance your car. While some might refinance to stretch out their loan over a longer period and therefore lower their payments, others are refinancing to put money back into their pockets.
On a $25,000 loan, saving just $20 per month over five years saves $1,200 over the life of the loan. That’s money that would come in handy for someone like Sandy — enough to pay her insurance premiums for a year.
Mukesh Chatter, chief executive of MoneyAisle (www.moneyaisle.com), says most people who buy a car finance it at the “point-of-sale,” that is, at the dealer.
“When a consumer buys a car, they usually tell the dealer what payment they can afford, and the dealer makes sure you get that,” Chatter says. “What they should focus on is the interest rate.”
But how do you know a good rate from a bad one? The problem, as Chatter points out, is that advertised rates are for those with prime credit. The vast majority of people have less-than-perfect credit, so finding the best rate is tough. At the least, you’d have to apply to numerous institutions.
That’s why car dealers typically add on two percentage points above what you might get through a financial institution. “That’s the gravy train for dealers,” Chatter says.
Chatter started MoneyAisle after he discovered a huge discrepancy in rates on bank CDs — a full four percentage point difference between those in Texas and New York. Leveraging his technology experience in networking — he sold his first company to Lucent Technologies for $900 million — he created a fully automated site that makes banks compete for your business and gives small- and medium-sized institutions a shot in the process. The online engine remains agnostic, he says, revealing the top three best rates and taking the same flat fee from the firm that wins your business.
If you’re wondering if you should refinance, here are a few rules of the road.
If your credit has improved, chances are you can get a better rate just as many can with their mortgages. Perhaps you had a blemish on your credit but enough time has passed such that it won’t have the same negative impact. But don’t forget to do what you can to improve your score before applying for any refinancing; your score is a moving target that changes as you make positive changes.
If you financed your car at the dealer, you may be able to lower your rate. Remember that dealer financing isn’t always the best and, in just a few minutes, you can now look at your options. Typically, all you need to know is your current loan balance, your monthly payment, and your credit score or general range (excellent, good, fair).
It’s easy to refinance your loan and think you’re lowering your borrowing costs just because your monthly payments are lower. But that may be because you’ve extended your loan another five years. If you do refinance, be sure you compare apples to apples using the annual percentage rate. Ideally, you should only refinance the existing unpaid balance and not extend the loan over a longer period.
So, just as refinancing your home could be a smart financial move, so too could refinancing your car.
