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Consumer Watch: Refinancing your car loan may save you money

Dec. 29, 2011 - 11:38AM   |   Last Updated: Dec. 29, 2011 - 11:38AM  |  
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Do the math

On a loan with a $10,000 balance at 5.99 percent APR, and 36 months of payments remaining:
• Current monthly payment: $304.17
• Total paid over 36 months: $10,950.12
If you refinanced at 1.99 percent APR for 36 months:
• Monthly payment: $286.38
• Monthly payment change: -$17.79
• Total paid over 36 months: $10,309.68
• Total savings over 36 months: $640.44
If you refinanced for a shorter term, at 1.99 percent APR, 24 months:
• Monthly payment: $425.36
• Monthly payment change: +$121.19
• Total paid over 24 months: $10,208.64
• Total savings over 24 months: $741.48
If you refinanced for a longer term, at 1.99 percent APR, 48 months:
• Monthly payment: $216.91
• Monthly payment change: -$87.26
• Total paid over 48 months: $10,411.68
• Total savings over 48 months: $538.44
Source: Military Times calculations using APR from bankrate.com

Depending on the annual percentage rate and other terms of your auto loan, you might want to look at refinancing. You could lower your monthly payment and save a few hundred bucks over the life of the loan.

Some military-affiliated financial institutions are advertising fairly attractive rates. As of this writing, Navy Federal Credit Union and USAA were offering auto loans as low as 1.79 percent APR; and Pentagon Federal Credit Union was offering online auto loans as low as 1.99 APR.

Some lenders may charge higher rates for refinanced loans. Bank of America, for example, had an APR of 2.74 percent for new car loans with terms of up to 60 months, but the rate for refinanced car loans was 3.09 percent.

Things to consider:

Not everyone may qualify for the lowest rate. This depends on your credit score and other factors, which vary by institution. If your credit score has dramatically improved since you got the original loan, then refinancing could work in your favor, says USAA spokesman John Hancock.

Make sure you understand the terms of the loan. Refinancing to a lower rate while keeping the same term will result in a lower monthly payment and lower overall interest charges. Generally, the shorter the term, the lower your rate. Many financial institutions charge higher rates for used autos than for new autos, but not always.

When you're comparing loans, check the terms carefully. For example:

• The Navy Federal 1.79 percentage rate is for new-vehicle loans for terms up to 60 months, and you can also get that rate if you're refinancing. USAA's 1.79 percent rate, however, is only for 36-month loans.

• If you apply for the Pentagon Federal auto loan over the phone using its member service line, the APR is 2.99 percent, while it's 1.99 percent if you apply online.

Run the numbers. Make sure there's an overall positive benefit, says Amy Doane, a spokeswoman for Pentagon Federal.

You'd save about $640 in interest over three years on the $10,000 balance of your loan if you refinanced it to a 1.99 percent APR from 5.99 percent, for example, assuming you have three years left on the loan. Your payments would drop by about $17.79 each month.

But if you converted the same 5.99 percent loan to a 48-month loan at 1.99 percent, you'd lower your monthly payments by $87. You'd still save $538 in interest, but if you can stick to the same term or lower, you save more money.

Another tactic: If you want to reduce the payments just to be sure you can handle them, continue making the higher payments and pay off the loan earlier.

Check for hidden fees. These deals may include fees for refinancing or restrictions such as prepayment penalties, which require you to pay extra if you pay the loan off early, Hancock says.

Shop around for the best deal. Some lenders even offer incentives to refinance your auto loan through them when you move it from a different lender.

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