Refinancing auto loan

Question: Is it possible to refinance an auto loan (I believe it is currently about 9.5%) if we were "upside down" going in to the purchase? Terri, Thiensville, WI

Answer: You might be able to refinance the loan at a lower rate. But since you owe more than the car is worth you'll probably have to fork out the difference before a lender will consider refinancing your loan.

You should also make sure that your auto loan doesn't have a prepayment penalty clause. It's important to shop around for a refinancing deal.

It goes without saying that I would run the numbers carefully to see if you come really out ahead. For example, Bankrate.com has an auto refinance calculator.

My basic approach is to be skeptical about the economics of refinancing an auto loan. But a lot of people are looking into it these days with money is so and interest rates so low. It's a way to trim monthly expenses. As a general guideline, lenders like to work with customers that own newer cars, say, 5 years or less. The loan shouldn't be upside down. Lenders like customers with big loans, too, running into the several thousands of dollars.

That said, here's my basic problem with this tactic. It's going to cost you more in the long run. Taking advantage of the decline in interest rates won't save most owners much on the loan. The real break on monthly payments comes from extending the life of the loan. You'll end up paying a lot more for that depreciated vehicle.

About the author

Chris Farrell is the economics editor of Marketplace Money.

Comments

I agree to American Public Media's Terms and Conditions.
With Generous Support From...