Refinancing existing car loan for lower rate?

[kellia]

I'd appreciate some advice! We have one car loan, balance is $6900, 6.2% interest. If we make the minimum payments, we've got a little over 2 years left.

Would it make sense to transfer the loan over to a credit union that would give us 2.75% interest? Or, is this kind of like a mortgage where I've been paying mostly interest up until now, so I wouldn't save much to transfer it. We only have one car payment now, so we'd like to make extra payments to pay it off in a little over a year.

Thank you for any advice!

 

[mjp12831]

I'd appreciate some advice! We have one car loan, balance is $6900, 6.2% interest. If we make the minimum payments, we've got a little over 2 years left.

Would it make sense to transfer the loan over to a credit union that would give us 2.75% interest? Or, is this kind of like a mortgage where I've been paying mostly interest up until now, so I wouldn't save much to transfer it. We only have one car payment now, so we'd like to make extra payments to pay it off in a little over a year.

Thank you for any advice!

The loan amortizes the same way a mortgage does - more of your monthly payment is interest at the beginning of the loan and more is principal at the end of the loan.

However, this is just a function of the balance being smaller (example - at the beginning of the loan if your balance is $20,000 then you are paying 6.2%of $20k, whereas now you're paying 6.2% of $6,900).

A high estimate of interest you will pay over the next 12 months can be figured by multiplying your balance by the rate ($6,900 x 6.2% is roughly $430). This is a high estimate because every month your principal balance goes down so the amount of interest you are paying also goes down. You could figure maybe another half of that in the final year so a high estimate of interest you will pay over two years is about $650.

Questions are what costs you'd incur to refinance (or transfer as you are saying) - every 1% you take off of your rate might save you around $70 or so over the two years (again oversimplified estimate). You're talking about 2.75% which is around 3.5% less - this lower rate would save you around $245 over the next 2 years in interest cost.

Any loan costs would eat into your savings, so if it costs you more than $250 to transfer the loan then it's not worth while.

 

[girli565]

I don't see why you shouldn't do it. Make sure there's no penalties for making extra payments and no additional or hidden fees to refinance that would negate the overall savings.

 

[msmayor]

Just make sure you are comparing interest rates for the right type of loan...are they offering that rate specifically for new cars, or is it for ANY car loan?

Refinancing an existing car loan means getting financing on a 'used' car, and sometimes the rates are different than new-car financing.