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Some car buyers don't know their loan options

DETROIT — As we move farther 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.

It's also a good idea to know what your credit history looks like, too.

The car loan refinancing deal you'd get, of course, depends on your credit history, the 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.

Educate yourself

. Car loan rates vary based on your credit score. See www.myfico.com and go to the Financial Help Center for information on auto loans.

. Several lenders, including credit unions, offer programs to refinance a car loan. Shop the rates and fees.

. It is easy to fall in love with what looks like the perfect deal on a new or used car, so maybe a 20 percent rate for a car loan might not seem bad to some people. But it's not a good rate, and you could qualify for a lower one.

. Pay attention to fees relating to a specific car loan — including if there is a large fee each time you make monthly payments online.

. If you have three years left on a five-year car loan, do not refinance to a five-year loan. You'd want a three-year car loan.

. If you refinance, make sure your old loan does not have any prepayment penalty.

. You may be able to get an even lower rate by having the monthly payments automatically deducted from your checking account.

Some car buyers don't know their loan options 03/28/13 [Last modified: Wednesday, March 27, 2013 5:16pm]
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