Refinance your auto loan

You might love your car, but what about that interest rate you are paying for it? You may find that refinancing can make you love it all.

Once you have a stable job, a good history of making loan payments on time and an improved credit rating, you could receive a better interest rate. If you still don't have your credit in order, you might not want to look into refinancing just yet. This is really something that you should only do once on a vehicle. 

If you have made all of your payments on time, your lender may simply give you a rate modification. The lender agrees to simply lower your interest rate. Call and ask. If your lender is willing to reduce your rate, you will see savings with having to refinance. This can save time and money.

Sometimes, lenders are unwilling to do this. If so, start looking into refinancing your loan. Start with reviewing your current loan documents.

Find out what your credit score is by ordering your credit report. You are allowed one free credit report each year from each of the three main reporting agencies.

You need to know whether or not your loan charges any prepayment penalties. Some loans will hit you with fees ranging from $25-$200.

You also need to know how your loan is calculated. Is it based on simple interest? Simple interest means that you are charged interest each day based on the balance you owe. What you want to know is if your loan interest is calculated based on the Rule of 78s. This can be a form of prepayment penalty.

The Rule of 78s means that the lender will collect three-fourths of the loan's interest during the first half of the loan. The earlier you try to pay off the loan, the more you will have to pay. The higher the interest rate, the higher your payoff amount. You aren't just paying off your principal, but the interest also. Check the loan contract to see if it allows a refund or rebate of interest. That will indicate that you've signed this type of pre-computed loan. Most auto loans will not use this form of interest calculation.

The best way to refinance is to take a simple interest loan with no prepayment penalties and refinance into a simple interest loan that has a lower rate. You have to shop around for the best rates. They can vary from institution to institution.

Make sure that you check with your local banks and credit unions. They can be very competitive in trying to get your business. They also may work with you a little more on some details of your credit history.

Watch out for the fees involved. Ask the lender for a breakdown of all the fees and ask about each specific one in detail.

If you owe more than your car is worth, you won't be able to borrow at a perfect interest rate. This happens in most cases. The lender will lend you enough money to pay off your existing loan. The loan will only be partially secured by your vehicle, because it isn't worth what you have borrowed. That makes the interest rate slightly higher.

If you are simply having trouble making your payments, your lender might extend the term of your existing loan. They aren't going to want to do it, but you should be able to show them why they should. They know that it is better to restructure the loan than to have you default on it.

There are some things you should watch out for when refinancing your car loan. For example, if you are in the market for a mortgage, it isn't a good idea to start making changes that will show up on your credit report. Wait and do it after your mortgage is secure.

Refinancing means that you will often be paying for the vehicle longer. This can totally destroy any interest savings you are incurring. Plus, your vehicle is depreciating every day. In three years, do you still want to owe more than it is worth?

Don't fall into a loan with prepayment penalties. Stick with loans that are computed based on simple interest. You can pay off your loan faster and more conveniently. You only want to pay interest on the current principal amount, not the amount of the total loan.