Okay, a few years back, you bought the right car for a good price, and despite the realities of car ownership, you’re very happy with the experience, and with your monthly payments. But then, your friend tells you how much money she saved REFINANCING her car, and it gets you thinking, “I wonder what would happen if I refinanced my car?”

Well, if you’re wondering if it makes sense, if it’s a good idea, if it will benefit you, you’re in the right place. Fortunately, there aren’t hundreds of concerns to weigh. According to Suzanne Kane of The Car Connection, you just need to ask yourself four questions:

Can you get a lower rate?
Do you project estimated savings over the life of the loan?
Are you less than two years into the life of your loan?
Does your current loan have any prepayment penalties?
NOTE: For all of the above questions, you’ll probably need a calculator and all of the information about your current loan. That information (and a calculator, coincidentally) is probably accessible by phone, by simply calling your current car loan company. You may need to call them more than once, but doing your homework at this stage can be more than worth the trouble.

Point 1 – Can you get a lower rate?

The rate that you will get when you refinance will depend on the financial institution that is offering it, and how they evaluate your creditworthiness. Once you have chosen a lender, and have received an offer, this will give you a starting point to understand what kind of interest rates you may be offered by refinancing institutions in general. Compare those rates with the interest rate of your current car loan. If your current rate is higher, then you may want to consider pursuing refinancing.

Point 2 – Do you project estimated savings over the life of the loan?

When you weigh the decision to refinance, add up the total cost of repayment of either scenario (your current loan AND the loan you would be paying on after refinancing), and determine which saves more money in the long run.

Point 3 – Are you less than two years into the life of your loan?

Simple, right? Well, maybe not.

Kane suggests to only consider refinancing if you are fairly early in the life of your loan, so that the expenses related to refinancing are significantly outweighed by the money saved in the long run by refinancing.

However, given that loan terms have grown significantly in the last few years, “early” is a relative term. It may still be best to use the overall savings calculation to judge the merit of whether or not to refinance.

Point 4 – Does your current loan have any prepayment penalties?

Simple answer: it shouldn’t. If it does, that’s bad. Companies like, that offer penalty-free prepayment, offer the greatest freedom to customers who want to pay off their loans early. However, if your auto finance company does penalize early payment, use those penalties in your calculations.

Armed with the information that results from your calculations, the question may not be “Whether or not to refi?”, but “When should I refi?”


Source:  Sonny Bynum