Day 24: Refinance Your Auto Loan

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When you’re trying to achieve Zero Debt status and financial freedom, remember to consider all types of debt: your mortgages, auto loans, credit cards, student loans, etc. Anytime you buy a car, realize that you’re purchasing a depreciating asset. Translation: as soon as you drive that new or used vehicle off the dealer’s lot, it immediately starts to lose value. Nobody ever re-sells a car for more than they paid for it. That makes a car different from assets like a home or stocks, where you expect to later sell them for more than your purchase price. So if you’re making car payments, it’s really important to manage this debt wisely. If you can’t pay 100% cash for your new wheels (and most people don’t), then at least be a savvy consumer when obtaining an auto loan. Your goal is to save money, and to avoid any negative marks on your credit that can result from missing car payments or having your car repossessed. Fortunately, vehicle financing is one area where you can cut your expenses (and keep the Repo Man at bay) with a little know-how and some simple action.

Many people don’t know that you can refinance your car loan, just as you can refinance a mortgage. But a car refinancing is easier, faster and requires no points, appraisal or closing costs. For this reason, auto refinancing has been called “one of the best-kept secrets in personal finance.”

To lower your car payments, turn to Capital One Auto Finance (www.capitaloneauto.com), the top online vehicle lender in the United States. Refinancing takes just 15 minutes and saves an average of $1,353 over the life of the loan. What will you do with the money you save? Pay down all your other debts, naturally.

The Capital One Advantage

If you’re in the market to buy a new or used car or motorcycle, Capital One Auto also offers you a blank check to buy the vehicle and give you more negotiating power at a car dealership.

Take the case of Jim Adsley. Adsley thought he got a good deal when he bought a used Cadillac with 8.25% financing through GMAC. But later, he found an even better bargain, by refinancing his auto loan at a 6.9% rate.

“I’ll save about $3,500” over the life of the loan, says Adsley, a retiree from Langley, WA, who used Capital One Auto.

All across the country, scores of consumers like Adsley are refinancing their car loans – prompted by the same low interest rate environment spurring homeowners to refinance their mortgages.

Auto refinancing is happening in much smaller numbers, though. Nevertheless, every year, hundreds of thousands of people refinance their auto loans, and altogether there are tens of billions of these loans outstanding, according to CNW Marketing Research. Meanwhile, the Mortgage Bankers Association reports that millions of homeowners refinanced their mortgages annually, with those loans totaling nearly $1 trillion.

Still, the number of people who have refinanced car notes is up 100% since 2001, says Matt Coffin, CEO of LowerMyBills.com. The web-based company allows consumers to comparison shop to slash their car payments and other monthly expenses. Coffin notes that one benefit of doing an auto refinancing is that, unlike refinancing a home loan, there are no points to pay and no appraisal required. “So you can save a lot of money.”

You generate savings in one of two ways. You can simply refinance your current loan if interest rates are lower than they were when you bought your car. Or you can extend the life of your auto loan, spreading your payments over a longer time period and thereby lowering your monthly car bill. Some people do both.

Online Lenders Dominate Auto Refinancing

Currently, hundreds of lenders nationwide offer auto refinancing. Many are online companies, such as E-loan.com, Bankloan.com, LendingTree.com, and RefinanceFirst.com.

The biggest player in the business, though, is CapitalOneAuto.com, a unit of Capital One Financial.

At CapitalOneAuto.com, you fill out an online application, providing information about your current monthly car payment, interest rate, and balance due. The company immediately performs a credit check, and if you apply during normal business hours, you receive an e-mail answer within 15 minutes. If you’re approved, the message will state your new monthly payment and revised interest rate. (Note: It pays to have good credit: as of October 2008, CapitalOneAuto.com’s best auto refinancing rate was 6.95% for loans as short as 36 months and as long as 72 months). After approval, the company mails you a check to pay off your existing car loan. Then you start making new payments to CapitalOneAuto.com.

For any auto refinancing, you’ll pay a lien transfer fee. It runs between $5 and $65, depending on the state in which you live. As of 2008, Capital One does not offer financing for motorcycles, vehicles older than seven years, cars with more than 70,000 miles, or automobiles purchased from individuals in a private party or person-to-person sale.

Beware Of Extending Your Loan Length

While auto refinancing offers savings and speed, it also has potential downsides, if you extend the life of your car loan unnecessarily. For instance, say you bought a car three years ago and originally had a five-year loan. You now have only two years left before you own the vehicle free and clear. But if you refinanced by taking out a new five-year loan, you’d be tacking on another three years of payments – extra interest and all. Additionally, any warranty covering your car could expire before you finish paying off your new loan.

That’s why auto refinancing typically makes the most sense for new loans where you feel a dealer or finance company dinged you on the interest rate charged. Refinancing can also be advantageous if you’ve been paying on your current auto loan for a year or two, and you don’t plan to extend your repayment term.

Finally, refinancing is worth pursuing if you had past credit problems that have since been resolved. Your improved credit standing makes you a better bank risk, and should get you a reduced interest rate.

Next – Day 25: Pick a Proper Debt Payoff Strategy