AUTO FINANCING Tips to getting better loan rate

Getting a new rate for your old car loan can save money.
PITTSBURGH POST-GAZETTE
You're patting yourself on the back, having saved a bundle by refinancing your home.
Now, what about that car loan? In most cases, the savings from refinancing an auto loan won't be huge. But the process is easy. And costs are nominal, so the savings start immediately. If you can save even a few hundred dollars over the loan term, why not?
The key to making it work is avoiding the temptation to refinance for a longer term than you have remaining on your original loan.
That means if you have four years to go on a five-year loan, don't refinance for longer than four years.
If you do stretch the term, you'll more than give back in additional monthly payments what you're saving by getting a lower interest rate, said Greg McBride, financial analyst for Bankrate.com.
In addition, unlike refinancing a mortgage where even a one percentage point drop in your interest rate can mean substantial savings over the life of the loan, with a car loan you'll need to get a new rate that's substantially lower than your existing one to rack up much saving.
"In most cases, there won't be a tremendous savings because you're going from a new car loan rate to a used car rate and those rates are higher," McBride said.
Best candidates
In general, the best candidates for auto refinancing are car owners who got a crummy rate initially -- such as people who didn't have established credit, or had bad credit at the time, but now qualify for standard rates. Refinancing now, with rates at 40-year lows, could save big bucks.
Let's say you took a five-year loan a year ago for $20,000 (the average car loan is about $22,000, McBride said) at a rate of 10 percent, giving you a monthly payment of $424.94.
Refinancing the remaining balance for four years at 6 percent would cut your payments to $393.48, for a savings of $31.46 a month, or roughly $1,500 over the four-year term. Not bad.
If the original interest rate were 8 percent, instead of 10 percent, however, the smaller spread would shrink savings to $15.42 a month, or a total of $740.16 over the life of the loan.
Smaller loans also produce smaller savings.
For example, a $10,000 loan refinanced from 8 percent to 6 percent would yield savings of just $8.02 a month, or $385 over the remaining four years.
"Some people will sneeze at that compared to what they're saving on mortgage payments," McBride said.
Checking rates
You can use a number of Web sites, such as www.bankrate.com, www.peoplefirst.com and www.eloan.com, to search current interest rates, calculate monthly savings and apply for a loan online.
Used car rates are averaging 8.97 percent nationwide, down from 10.74 percent two years ago before rates started to plunge, according to Bankrate.com. But average rates are deceiving. Right now, it's not hard to find used car rates in the 5 percent range.
Generally, there are no fees to ante up, though some lenders charge an application fee of up to $50. Zero-fee loans are common, McBride said, so start your search with that in mind.
You also should check to make sure your existing loan doesn't have a prepayment penalty.
If you're a homeowner, you might want to consider paying off your car loan with a home equity loan instead of refinancing. That way, you can deduct the interest from your federal income taxes.
"Not only are rates on home equity loans generally lower, if you throw in the tax deductibility" it's an even better deal, McBride said.