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Refinancing Car Loans Can Save After Interest Rate Cuts

Online Applications Make Process Easy

By Philip Reed

As interest rates drop, people's thoughts turn to refinancing -- refinancing their home loan, that is. What they don't know is that refinancing an auto loan is easier to do, and it can save you some serious money.

How much? Say you bought a new car six months ago. And say there were a few dings on your credit so the dealer told you that your loan would be 11 percent on a 5-year loan for a $23,000 car. Your monthly payments are $500.

Now let's say that you surf the Web until you find a company that offers auto refinancing. You could refinance the balance of your loan and lower your payments to about $400 a month. That's a savings of nearly $6,000 over the life of the loan.

Other examples could well be more dramatic. In some cases, a new car buyer could wind up with a loan based on an 18 percent interest rate. By refinancing at a competitive rate, the monthly payments would be slashed.

"One of the best-kept secrets today is refinancing your auto loan via the Internet," said Brian Reed, president of PeopleFirst.com. "All it takes is the time to fill out the application -- which is about 10 minutes."

Other lenders have also gotten into the refinancing game. E-Loan.com refinances cars on a "referral" basis — taking loan applications and matching them with banks. An E-Loan spokesperson said the recent dip in interest rates has brought a steady stream of customers.

Bankloan.com is another company refinancing auto loans. On its home page, a flashing sign seems to reflect the feelings of many consumers: "Love your car, hate your car loan?" In a nutshell, this sentiment is exactly what moves people toward auto refinancing.

PeopleFirst.com has been a leader in the online lending field since they started 1995. The first loans were put on the books in 1997, said Reed, and last year the company wrote $750 million in loans.

"So far this year, we're on pace to double that figure," Reed said.

Reed points out that his company has given "people the ability to go into a dealership as a 'cash buyer.' Otherwise, once the salesman starts talking about interest rates and monthly payments, the customer comes out of the dealership with their heads spinning."

So what kind of consumers should consider refinancing their auto loans? Reed has identified the four types and given them each a name:

The Saver -- This type of customer is always keeping an eye on the Federal Reserve and when interest rates drop, Savers begin shopping for a way to improve their personal financial picture.

The Newly Educated Remorseful -- A car owner may have recently bought a new vehicle and financed it through the dealership. Then, a neighbor or friend innocently asks, "So what interest rate did they give you?" The car owner goes back to the contract and finds that the dealer made a pretty penny on them by marking up the interest rate several percentage points. Buyer's remorse sets in ... and the search for a new auto loan begins.

The Budgeter -- This customer may have bought the car on a short-term loan — say two years. The payments are high but affordable. Now suppose this customer's economic picture changes — he buys a house, for example — and his monthly expenses shoot up. He looks at that auto loan and wants to spread the payment out over a longer period of time. Refinancing the auto loan is just the ticket to do that.

The Lessor -- Many people are leasing their cars these days. Some find that they want to keep the car at the end of their lease. In some cases, the dealer is of no help establishing a loan. Doing a "buy out" -- where the customer actually purchases the car and establishes a loan — is a smart move in this case.

As a test case, we called Peoplefirst.com and asked for their best rate to refinance a $10,000 loan on a late-model used car. We were told that the loan could be financed (subject to credit approval) at 7.45 percent and monthly payments would be $310.83. The application was free and could be made online. However, there would be a $15 lien filing fee (it varies from $5 to $65 depending on which state you live in).

Consumers who are thinking of refinancing should visit Bankrate.com. By typing in the name of your state of residence and the city closest to you, a list of lenders and their rates are presented in an easy-to-read table. The table also shows whether a fee is charged; contact information is given, too.

So, if refinancing is such a great move, why don't more people do it? Possibly, they anticipate the same kind of application-heavy process found in refinancing a home loan. It could simply be that people don't know it is possible. After all, the only risk is the five to 10 minutes it takes to fill out the application. Make sure, however, that no points are charged for the refinance process.

Remember, as the federal interest rate drops, auto loan rates follow. Why throw that money away paying interest? Join the wave of the future and surf the Web for a good new auto loan.