Paycheck Chronicles

Refinance Your Car? Why and How


Minivan I recently received a question about refinancing a car loan.  In a perfect world, none of us have to take out a loan to buy a car, or we get such a small loan that it is paid off very quickly.  Unfortunately, it doesn't always work that way.  For a variety of reasons, many Americans have car loans, and some of them are quite large.

A lot of people don't know that car loans can be refinanced, it can be easy, and it can save you a lot of money.  I have personally refinanced two car loans during my life, and I also got my bank to lower the interest rate on one (in lieu of a refinance.)  Altogether, I saved hundreds of dollars in interest on those loans.    With current car loan rates advertised as low as 5 and 6 percent, refinancing might benefit you.  Want to know how?  Here are the steps:  (it's not hard, I promise.)

    1. First, figure out the terms of your current loan.  You will need to know the current balance, the interest rate, your monthly payment, and any special info.  One piece of information that is important is whether your current loan has any "gap" insurance (which guarantees that the lender will pay the entire loan even if car is totalled and you owe more than it is worth.)  Another thing to know is how your lender feels about allowing the vehicle outside of the US - some companies won't let you take your car on PCS orders outside of the country while they have a lien against it.  Make sure that your loan doesn't have a prepayment penalty - it isn't common with car loans but some bad loans do have them.  You can call your lender to ask.
    1. Pick one or two reputable banks or credit unions to check with.  I have personally refinanced with Navy Federal Credit Union and USAA Federal Savings Bank.  I also know that Pentagon Federal Credit Union has excellent rates, and so far their service has been good.  You don't have to use these companies, but they are the companies with whom I've had good experiences.  Whatever credit union or bank you use is okay.  While I don't have any proof, I have found that service seems to be better with credit unions or banks.  I wouldn't recommend using a company that specializes in auto lending - I have yet to see an auto lending company with the service, interest rates and fee-free policies that a good credit union or bank offers.
    1. Check online to see their current interest rates.  Decide if your vehicle qualifies as new (usually this model year and next model year), used, or refinance, based upon your bank/credit unions definitions.
    1. Looking at your current information, decide whether should you pursue a refinance. The main reason that people choose to refinance a car loan is that they can get a better interest rate.  However, that isn't the only reason.  Sometimes borrowers would like to shorten their loan term, or are unhappy with their current company for some reason.  I'm sure there are more reasons that I have forgotten or never even considered.
  1. Once you've chosen a bank (or two, or three), call and ask questions.
    • Are there any fees associated with refinancing a car loan?
    • Are you eligible for the advertised interest rate?
    • Are there any rate discounts available, such as for automatic payment?
    • Take notes so you don't get confused.
    • Check to see if they prohibit vehicles on which they have liens from leaving the US - even if you have no plans to PCS, this is an important thing to know.  If you do get unexpected orders outside the US, dealing with an uncooperative lender will make your life difficult.)
  2. Call your current lender and tell them that you are considering refinancing.  Let them know the best interest rate that you have found and ask if they would be able to match that rate.  I know this has worked with USAA in the past.  I have heard that other lenders won't go for this, but I think the possibility warrants the time for a phone call.  The worst they can say is "no."  If they do agree, however, you've saved the retitling fee, plus the time required to process a refinance.
  3. If your current lender won't lower your interest rate, call or go online to your first pick bank or credit union.  Apply for a refinance.  You will usually get an answer very quickly, within a day or so.  Sometimes it is even faster!  Make sure to ask if there are any interest rate discounts available, such as the automatic payment discount I talked about above.  Once you are approved, you will have to go to the bank or credit union, or have the papers delivered to be signed, for the new loan to be processed.
  4. You will have to pay to have a new title issued for the car.  The reason is that the car will then be retitled with the new lender's name listed on the title.  Fees vary by state but usually run between $10 and $50.  Your state motor vehicle administration can tell you about the fees before you decide to refinance.  The lender usually takes care this for you; just check to make sure that it is done.  Make sure to retain the release of lien from your previous lender - you don't want to discover several years from now that they failed to release the lien on your car.
All this can take as little as half an hour, or a couple of hours at the most.  Obviously, people with the larger loans or the higher interest rates will benefit the most from refinancing, but even lowering your car payment by $20 a month can help during these challenging economic times.  Take a few minutes today to see if vehicle refinancing will work for you.  I hope to be hearing success stories soon!

photo by:  ewan and donabel

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