Homeowners with equity and good credit have been rushing to refinance mortgages at record-low interest rates, but they aren't the only people who should think about refinancing loans.
Anyone who bought a new car during the past several years is a potential candidate for a money-saving loan makeover.
Car loans are usually short-term arrangements, typically six years or less, so people aren't used to thinking about refinancing them.
But auto loan rates, like mortgage rates, have plunged. And unlike mortgages, an auto loan refinancing typically involves no fees or cash out of pocket, so any interest rate savings can be realized immediately.
Also unlike mortgages, banks and credit unions are eager to write car loans. In fact, some are offering cash incentives for refinancing.
Here's an example of the potential benefits.
Let's say you financed $20,000 to purchase a car or truck at the end of 2009, when the national average for a 60-month new car loan was 6.8 percent, according to Bankrate.com. Rates for used car loans were higher, as they usually are.
At that 6.8 percent interest rate, you've been paying $339 a month on the car loan, you would owe $12,641 at the end of this month, and you'll be paying off that loan until the end of 2015. Refinance the loan at today's best rates and you could save $33 a month.
That's free money — nearly $1,400 over the remaining life of the loan. You'd simply be keeping some of the cash you otherwise would have paid in interest charges.
The best offer I've seen advertised locally is an interest rate of 2.75 percent that comes with a $100 cash incentive for transferring a loan from a rival lender. That's from S.C. Federal Credit Union, and its best rate is for people who also have a savings account there and refinance an auto loan worth $10,000 or more.
With a refinancing, the larger the loan, the larger your potential savings would be.
If your goal is to save money on interest charges, you could refinance into a shorter-term loan. If your goal is to increase cash flow, you could potentially extend the term of the loan and still save money due to lower interest rates.
For example, take that loan with a $12,641 balance and 42 months left to pay at 6.8 percent interest, refinance it as a 48-month loan at 2.75 percent interest, and the payment would drop from $330 to $278. The loan would last six months longer, but you'd still save $877 in interest on the remainder of the loan, while increasing your short-term cash flow.
In my examples, I used a $20,000 car loan. I realize lots of people don't have $20,000 cars, but some banks will only talk to you about refinancing an auto loan if you still owe at least $10,000 on a loan.
Other lenders want a minimum refinance amount of $5,000. Interest rates will vary depending on the amount, term, model year of the vehicle and creditworthiness of the borrower.
So if you're paying off a sizable auto loan that was written when rates were higher, consider shopping it around to see what you might save.
Reach David Slade at 937-5552 or Twitter @DSlade News.
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