Refinancing Auto Loan May Mean Big Savings

Consumers who think they can’t capitalize on falling interest rates because they don’t own a house ought to talk to Corey Young. The Brentwood medical-plan salesman refinanced his car loan in a transaction that could save him about $1,300.

“I’m always looking for a better value,” he said. “I was curious to know if I could refinance a used car and save money.”

Young is by no means alone. It used to be uneconomical to refinance a car, but a combination of factors--including rapidly falling interest rates--has created a booming market for auto refinancing.

In the past, auto refinancing rarely made sense because it typically requires replacing a new-car loan with a used-car loan. And because cars depreciate, cutting the value of the lender’s collateral, interest rates on used-car loans usually are so much higher that refinancing was a money-losing proposition.

But interest rates have fallen so far that used-car loans are being offered at lower rates than new-car loans were two years ago, experts note. That’s creating opportunities for savvy borrowers.

Last year, 297,363 car owners refinanced, said Art Spinella, vice president and general manager of CNW Marketing Research, a Bandon, Ore.-based firm that tracks auto statistics. That’s a 48% increase from the previous year. And 2002 looks to be even bigger, with an estimated 450,000 car owners trading in their loans.

“There’s always been a market for refinancing a car,” said Thomas P. Wirth, senior vice president of consumer lending at U.S. Bank in Minneapolis. “But this year it’s much more so because of the interest rate cycle. You have people who took out car loans in 2001 and 2000--or even in 1999--who can benefit by refinancing their cars to a lower rate.”

Young can attest to that. When he got his new Honda Accord two years ago, the interest rate for a good credit risk was 8.9%, he said. When he refinanced the loan recently, his interest rate fell to 6.03%.

Unlike refinancing a house, in which the borrower probably will pay thousands in appraisal and title insurance costs, there are few fees associated with an auto refinance. The only fee Young paid was a $15 lien transfer charge.

“Auto refinancing is one of the best-kept secrets in finance,” said Brian Reed, president of PeopleFirst, an online auto finance firm. “Everybody thinks about refinancing their mortgage when interest rates drop. But then they have to worry about how long it will take to pay back the fees through monthly savings. With your car, there really are no fees. If you can get a lower rate, you can save money.”

The savings can be even more compelling for those who have had credit problems but have worked to resolve them.

Consider Ward Jewell, a Santa Monica architect. When he secured a loan on his Audi Quattro two years ago, he was newly divorced and his credit rating had suffered for it. The dealer charged a hefty 15.9% on his $31,000 car loan, leaving him with a $767 monthly payment.

Now, with his credit largely repaired, he has been able to refinance the car at a 7.49% rate, cutting his monthly payment by more than $100 to $652.42. The refinancing will save him more than $4,500 over the remaining 40 months of the loan.

“It was a big change,” he said.

The only caveat: Some people are tempted to stretch the payment term--getting a new five-year loan even though they had whittled down the number of remaining payments. Stretching out the term costs you, Spinella said.

“When you stretch out the term of the deal, even if you’re getting a lower rate and lower monthly payments, you aren’t necessarily saving money,” Spinella noted.

Consider someone who financed a car with a $10,000 five-year loan at 8%. The monthly payment would be about $203. If the borrower refinanced the loan after making the first 12 payments, about $8,300 would remain on the loan. At a 6% rate, the payments would fall to just less than $195 a month, with the original loan term--in other words, 48 more payments. That would save the borrower nearly $400 over the life of the loan.

However, if the borrower signed up for another five-year loan, the monthly payment would drop to about $160, but payments would be made for 12 additional months. That would cost $271 more than if he had refinanced the loan and paid it off on the original repayment schedule, and only slightly less than if he’d never refinanced.

Consumers who want to refinance a car loan have several options. In addition to PeopleFirst (www.peoplefirst.com), many banks and credit unions offer car refinance loans, said Fritz Elmendorff, a spokesman for the Consumer Bankers Assn. in Arlington, Va.

“Used-car loans are more available than they’ve been in a long time,” he said. “And there just aren’t any fees to speak of when you refinance.”

Times staff writer Kathy M. Kristof, author of “Investing 101” (Bloomberg Press, 2000), welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous Personal Finance columns visit The Times’ Web site at www.latimes .com/perfin.