Auto Finance: Are You Paying Too Much for Your Car Loan?

Last Updated Feb 23, 2011 7:54 PM EST

If you have a mortgage, you have probably considered refinancing it at a lower rate. But what about your car loan? Auto finance rates are low right now, and a timely refinancing could save up to $100 on your monthly payments. You can check rates easily online.

Refinancing is often a good deal for buyers who got their loan through the dealer. "Car dealers buy and sell money for profit, " says Linda Goldberg, owner of auto brokerage firm CarQ, which arranges financing for clients as well as negotiating their car purchases. "Sometimes the financing profit can be three times the dealer's profit from selling the car." (See Auto Finance: Watch out for These Dealer Scams). Check current auto refinancing rates at Yahoo Autos, and if the rate matching your credit rating is much lower than the one on your loan, consider a refi.

Like original new car financing, refinancing is all about your credit score. Go to annualcreditreport.com, look over your report and take the paid option to get your score. (Avoid sound-alike sites that just want to sell you a monthly credit monitoring service). That will tell you what kind of interest rate you qualify for. For instance, the Yahoo average used car or refinancing rate for high FICO credit scores above 720 is 5.73%, while the rate for mid-level credit of 620-659 is 9.4%. But loan rates vary widely around those averages. With sites that offer competing refinancing deals, you may find much better rates.

In addition to Yahoo Autos, check out Bankrate.com and a new site, MoneyAisle.com, which will refer you to banks or credit unions interested in refinancing loans. MoneyAisle has the advantage of showing you an offer based on your credit rating without actually applying for the loan. Thus you do not have multiple sources running a credit check -- a situation that can hurt your credit score.

Let's say you have a 2010 Chevrolet Malibu sedan (at left) that you have owned for 10 months. Your original four-year loan was for $20,000, and, thanks to a bad deal at the dealership, you're stuck you with a 12% interest rate and payments of $526 a month. Let's say further you have a top credit score. Checking refinancing offers on MoneyAisle.com, you could refinance your loan balance at 3.39% for four years and your payments would drop to $430 a month -- a $96 saving.

"I'm often amazed that consumers have no idea how much more they pay when they accept a typical loan from a dealer," says MoneyAisle CEO Mukesh Chatter, who before starting the site founded internet router company Nexabit Networks and sold it to Lucent Technologies. Chatter says that refinancings are available as well for middle-level credits and -- just recently -- even in some subprime categories.

If you are just thinking about buying a car rather than refinancing an existing loan, follow these steps to make sure you are not stuck paying too much for your car loan:

Get financing approved in advance. If you are pre-approved for loan before you walk into the showroom, there's no pressure to take dealer financing. And the dealer then is motivated to compete with the deal you already have -- perhaps with zero percent or promotional financing if you qualify. Before shopping for a car, check for a preapproved loan with your bank or credit union or on-line financing sites such as Myautoloan.com, Yahoo Autos, Bankrate.com and MoneyAisle.com.

Consider a down payment if you can afford it. Making a 20% down payment helps protect you against the depreciation of a new car. Otherwise, you could end up owing more on your loan than the car is worth.

Know your credit score. If you don't have a pre-approved loan, at least be sure of your credit score. A typical scam is to claim your credit score is too low for 0% or low-rate financing when in fact you could qualify. If your FICO score is 740 or above, you should qualify for almost any special promotional financing. If you are carrying a printed report of your score, the dealer's finance department cannot play games.

Whether looking to refinance your current loan or find a new one before car shopping, considering competing offers will help you get the best deal.
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    View all articles by Jerry Edgerton on CBS MoneyWatch»
    Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. The former car columnist for Money magazine and Washington correspondent for Business Week, Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.

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