Some car buyers don't know their loan options
Sonny Rahim, sales consultant at Suzuki, Subaru and Volkswagen dealership in Riverhead shows Steve Demaddis from Port Jefferson a 2012 Jetta. (Feb. 1, 2012) Credit: Photo by randee daddona
As we move further away from the credit freeze, some consumers might want to think about taking a blowtorch to high-rate car loans that they took out just two years ago or so.
It may be possible to find _ and yes, qualify for _ a lower rate that would make refinancing an existing car loan a great way to save money.
Jessica Hearns, 23, bought her used car during the financial crunch in July 2009. She didn't have much of a credit history, and she ended up getting stuck with a 19 percent rate for a five-year car loan on her blue 2007 Chevrolet Impala.
Hearns, who works at MGM Grand Detroit, said her mother kept nudging her to refinance that car loan.
"She said my interest rate was entirely too high," Hearns said.
In January, she worked with the Communicating Arts Credit Union in Detroit to refinance that car loan to a 3.5 percent rate for a three-year loan.
The payment dropped to $165 a month from $225 a month. Yet in order to pay that car off even sooner, she plans to pay $240 a month.
"You save a lot of money, and it's a great deal," Hearns said.
Consider another example: What if you could qualify for a car loan at 4 percent to replace an old loan at 12 percent?
In this case, a consumer could save around $49.50 a month, according to an example worked up by Greg McBride, senior financial analyst at Bankrate.com.
Say a consumer took out a $20,000 five-year loan at 12 percent two years ago. That payment would be $444.89 a month.
Now that there's three years left on that loan, you'd want to refinance to a three-year loan. The idea is not to refinance and string out the payments even further.
If someone's credit has improved, the consumer might qualify for a 4 percent rate on a three-year car loan and end up paying $395.46 a month, he said.
In that example, McBride said, the customer would save $1,780 in interest over the life of the loan by refinancing to that deal.
"Not everybody in town is charging the same price," he said.
The Bankrate.com survey in early February showed that the average five-year new car loan rate was 5.24 percent and the average three-year used car loan rate was 6.22 percent.
But rates can be significantly lower at some lenders.
If you want to get a car loan _ or refinance one, it's important to shop around on rates. Several lenders are running promotions on car loans.
Auburn Hills-based Genisys Credit Union, for example, recently ran a promotion that offered to "help you refinance a vehicle loan that you have with another lender for as low as 2.49 percent APR for 36 months."
It's also a good idea to know what your credit history looks like, too.
The refinancing car loan deal you'd get, of course, depends on your credit history, age of the vehicle, and whether you have a job.
"They're not going to issue you a new loan unless you have a way to pay for it," McBride said.
But if a consumer has paid bills on time or reduced their debt, they might have a better credit score and qualify for a better rate than when they took out the car loan a year or two ago.
Several factors could be working in a consumer's favor: Low interest rates, high values on used cars, an improved jobs picture and more attractive credit scores.
It's also possible that a consumer ended up getting a very bad deal on a car loan rate the first time through a consumer loan finance company or elsewhere.
One consumer received a rate of 22.23 percent through one finance company _ and was charged $10.95 each time to make the car loan payment online.
The customer obtained a rate of 10.875 percent through the Communicating Arts Credit Union.
Hank Hubbard, president and CEO of Communicating Arts Credit Union, said the credit union was granted $1.5 million from the Community Development Financial Institutions Fund to make affordable car loans more available to consumers, especially those with extremely high car loan rates.
More than 50 percent of the customers at the Detroit-based credit union qualify as low-income, and many have subprime credit.
"It gives us the freedom to try some things that are a little innovative," he said.
The refinanced car loans have no application fee and no origination fee.
Hubbard said he finds it obscene that some customers are paying 25 percent on car loans but then were able to qualify for rates of 11 percent or lower at the credit union.
Think of how much money could be wasted if you hang onto a high rate car loan when you could find an even lower rate.
