Banks Offering Car Refinancing

A handful of banks are starting to refinance auto loans, potentially saving consumers some money while boosting banks’ slipping auto lending business.

Though riskier for lenders than new-car loans, auto refinancings are expected to catch on among bankers as they attempt to regain business lost to credit unions and car dealers.

For consumers, auto refinancing could offer modest savings. Karen Chura of the Washington-based Consumer Bankers Assn. said consumers who refinance their auto loans lower their monthly payments an average of $30. “It can be attractive for some people,” she said.

Chura said auto refinancing usually makes sense for consumers who can reduce their loan rate on a vehicle up to 2 years old by 2 percentage points. The term length of refinanced loans is negotiable, banks said.

However, the refinancing programs have limitations that may put them out of reach for many consumers. Generally, banks will refinance autos that are no more than a few years old. And some banks charge refinancing fees of $50 to $125, which could wipe out much of the anticipated savings.

For example, First Interstate Bank in Los Angeles offers a 10% refinancing rate for cars valued between $7,500 and $15,000 and charges a $60 processing fee. Consequently, demand has been modest.

“Rates haven’t come down enough recently to make that attractive,” spokeswoman Cheryl Friedling said. Also, unlike banks that have had success with auto refinancing, First Interstate has not aggressively promoted its program.

“The key is for consumers to add up the interest charges and fees and look at the bottom-line cost,” said Robert Heady, editor of Bank Rate Monitor, a newsletter.

Auto refinancing may have pitfalls for lenders too. Unlike real estate, car values decline over time, meaning that lenders can get stuck with a badly depreciated asset if a borrower defaults.

John Merlo, senior vice president at Hughes Aircraft Employees Federal Credit Union, said his credit union won’t refinance a car more than 45 days old because cars lose value so quickly.

The driving force behind auto refinancing is the significant drop in interest rates the last two years. New-car loan rates peaked in 1989 at 12.58%. Now, according to Heady, the average new-car loan rate offered by banks is 10.08%.

At the same time, banks have been losing ground in auto lending to credit unions and car dealers, which snagged consumers with low-rate incentive financing. According to the Credit Union National Assn., a trade group, the banking industry’s share of the auto lending business slipped in January to 43.7% from 44.7% a year earlier.

The slippage is especially painful to the banking industry because the amount loaned to buy cars fell last year to $266.7 billion from $282.2 billion the year before, as auto sales shrank.

“With the drop in new-car lending, you have to look for additional opportunities,” said Jim Koons, a vice president at Charlotte, N.C.--based NationsBank, among the first banks to leap into auto refinancing. It is refinancing cars in its branch areas at rates ranging between 7.99% and 8.5%, depending on local competition.

First National Bank of Chicago said it received 2,000 applications when it offered an 11-day auto refinancing “sale” at a rate of 9.5% last month. It is now running a direct-mail campaign aimed at car buyers in the Chicago area.