Auto Refinancing

Written by Jeremy Horelick
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Millions of homeowners take advantage of refinancing deals in order to save money on their mortgages each year. Surprisingly, very few of these same customers ever think to cut their auto loan payments using the same principle, when this is a viable option. Why is it that one type of refinancing is so popular while the other is virtually unheard of?

One possible explanation is the relative pittance a car costs compared with a home. Put a 15,000-dollar automobile alongside a 150,000-dollar house, and it's easy to draw a few erroneous conclusions. The first of these is that your money-saving opportunities are ten times greater on your house, for its purchase price is ten times higher. This, however, neglects the fact that cars and homes often follow radically different rules of finance.

A second explanation is that auto refinance companies simply do a poor job of advertising. It's not that these lenders are marketing morons when it comes to their auto loan products. Rather, the profit margins on auto loans vis-a-vis home equity loans and lines of credit are much smaller, so there's no good reason for these lending institutions to push them.

Demystifying the Auto Re-Fi

One of the first lessons consumers must realize is that the world of refinancing is not a zero-sum game. In other words, it's perfectly reasonable for you to refinance your house and your car at the same time--namely, when interest rates drop and therefore make it practical to do so. But taking, say, a 5,000-dollar line of credit through an auto refinancing deal doesn't eat into your potential savings on your home re-fi. The smart shopper does both simultaneously.

Unfortunately, getting great refinancing rates isn't just about smarts; it's about your credit score as well. Most people don't put enough stock in their credit ratings because they either fail to understand their significance or they never see them to begin with. Only after they've been swindled by a sales rep and locked into a 20-percent APR do they bother to do their own due diligence. At that point, they're horrified at what they discover.

The primary thing these shoppers realize is that their lenders may have talked them out of the rates they deserved through misleading language. A sales rep may come back to the desk with a sheet of paper claiming that you, the borrower, scored a hundred or two hundred (or more) points lower on your credit check than you actually did. When you're ready to obtain financing, the smartest thing you can do is to empower yourself by understanding your own credit history and rating. Then go out and get your hands on a copy of your own credit report. While most lenders are honest, having this information at your fingertips never hurts.

Who Qualifies for Auto Refinancing?

Just about anyone with a credit history may qualify for a re-fi deal, but that doesn't mean you should necessarily apply. Understand that your car is a depreciating asset (and how!). To that end, many lenders will have no interest in extending you an offer, especially if your car's resale value is less than the amount you intend to borrow.

It's also worth mentioning that many lenders will pass on you as a borrower if you're too deep into the term of your loan. These lenders simply cannot make enough money on you, and so they will turn their attention to new car buyers instead. Your best bet if you are looking to refinance is to do so as early into your term as possible. Of course, don't forget to wait until rates drop as well so that you can take full advantage of your re-fi deal.

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