Auto Loan Refinancing Considerations
Is It Worth Refinancing?
Refinancing a car loan is typically much easier than refinancing a mortgage, taking an hour or so, instead of weeks. With an auto loan, there may be little or no application fee, and there is no title insurance or other serious closing costs, just a minor title transfer fee. While it can take years for a mortgage refinance to pay for itself, a new vehicle loan at a lower rate can start producing savings right away.
Loan Term: As with any refinancing situation, the borrower should be careful not to wipe out the savings by extending the loan term. If you have just two years left on the old loan, paying it off with a new five-year loan could actually increase your costs by adding three years of interest payments.
Cash-In: Borrowers with spare cash should also consider a “cash-in” refinancing. If you owe $15,000, you could use $5,000 in cash to reduce the new loan to $10,000. Assuming the new loan charged 6%, this would be like earning 6% on your $5,000, a pretty good yield given today’s money market and GIC rates.
Home Equity Line of Credit: Use the equity in your home as colateral to lessen the “credit risk” and lower your interest rate. HELOCs offer introductory rates of just over 3%. After the initial period, typically one to six months, the rate will adjust monthly by adding a “margin,” or set number of percentage points, to the prime rate. With a prime currently at 3.25%, a borrower with good credit might get a two-point margin for a rate of 5.25% after the introductory period.
But with the HELOCs there’s always a risk the rate could go up. A HELOC would be best for the driver who wants to benefit from today’s low rates and has cash available to pay the loan off if rates jump. Given the Federal Reserve’s commitment to keep short-term rates low for the next couple of years, a HELOC might produce real savings at minimal risk.