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Making The Auto Refinance Decision. A Free Online Loan Guide
By EchoBay Loans Staff Writer

Trying to decide whether refinancing your car is the best decision for you can be a confusing task. There are many factors that play into this decision. A variety of reasons can prompt you to consider refinancing such as the desire to lower your interest rate, extend the length of your loan term by additional months, or to simply lower your monthly payment. No matter what your reason may be, it can never hurt to investigate the pros and cons of each decision.

Depending on your situation, there can be various financial benefits to an auto refinance loan. But if you are not careful in choosing the terms in your new auto refinance loan, you could end up paying even more for your car than you would have originally. This online guide will direct you through a variety of items you should consider when you are looking to refinance your car.

  Refinance when... Don't refinance when...
Loan term You can shorten the car loan term and therefore save yourself in total interest paid for the loan. You will be extending the loan term to an degree that additional interest payments will become excessive over the term of the loan.
# of payments left You have more than 18 payments left on the loan. At this point, there will still be a large portion of interest expense to pay which can be refinanced at a lower rate. If you have less than 18 payments left on the loan, you should not consider an auto refinance. In this situation, you have already paid the majority of the interest since this is usually accomplished in the beginning of a car loan.
Interest rate The auto refinance rate is lower than the rate you originally financed your car for. You can find auto refinance rates online. The difference in the refinancing rate should be at least one point. If the auto refinance rate is essentially the same as the rate you currently have. You will not be saving money in the long term in this situation, especially if the initial loan term is extended resulting in additional interest payments.
Credit rating If you have good or excellent credit or if your credit rating has improved since you took out the original car loan. This could result in a lower refinancing rate than what you are currently paying. If your credit has deteriorated or if you have bad credit that has not improved. In all likelihood, the auto refinance rate is not going to be lower. If your credit has deteriorated, the rate may be higher.
Home ownership The interest rate on a home equity loan (HEL) or line of credit is higher than the auto refinance rate from a car loan lender. The minimum initial draw amount on a HEL is greater than what is owed on your car loan. You own your home, and you can use a home equity loan or line of credit to pay off your auto loan instead of using an auto refinance loan. This can enable you to deduct the interest if you qualify and may even be at a lower interest rate.
Penalties You do not have prepayment penalties on your current loan and you will be able to refinance without any additional fees. Your loan has a prepayment penalty which will be a cost to getting an auto refinance loan. This penalty is implemented if you pay off your loan early and can be quite steep.
Type of loan You have a simple interest loan and you have significant time left on the loan. You have a pre-computed loan which will cause you to incur additional interest charges when paying off this original loan. On pre-computed loans, you will pay a great deal of interest upfront, this is especially true if the lender is applying the Rule of 78s.

As you can see, the decision to refinance is based on a number of factors. In all likelihood, you were not able to answer yes to everything in one column. In this case, you must weigh out the pros and cons and see which one is best for you. A few simple calculations showing the difference in payments and the interest paid over the life of the loan as well as any fees can also help to simplify the situation for you.

When rates drop, it is always wise to investigate refinancing of your loans and your auto loan should not be excluded. Be sure to seek free quotes from a variety of sources such as online lenders, credit unions and banks, so you can ensure you are getting the best deal for your individual situation.


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