I just learned a new way to SAVE BIG and it's too late to make it into my book of that title. Doh! That's the trouble with books. They're so … final. As I've been telling you in this weekly column, I just wrote a book called "SAVE BIG: Cut Your Top 5 Costs and Save Thousands."
It's packed with savings strategies that have the potential to save you at least $1,000. I was all excited last week when I received the first actual, physical, shiny books I could hold in my hands.
But, then, just a couple days later, I saw this great Bankrate.com article about how you can save thousands of dollars by refinancing your auto loan. Wow! I live and preach the power of SAVING BIG but this was a new one on me.
I didn't know whether to be excited or annoyed. I sure wish I had heard of car loan refinancing before my book deadline, so I could have included it. On the other hand, I'm trying to get a dialogue going about the power of SAVING BIG instead of small, so I always welcome fresh savings techniques.
So here's a recap of that great article by Russ Heaps of Bankrate.com, with a few caveats of my own thrown in. Refinancing can save you thousands of dollars over the life of your car loan. With rates where they are right now, if you are paying more than 6 percent, refinancing could be good for you.
I was amazed to read that refinancing a car loan is pretty quick and easy with minimal fees and no appraisal required. Heaps points out several scenarios in which refinancing a car loan could make a lot of sense. I am a big fan of three of them:
If interest rates have dropped significantly since you took out your original auto loan. This is a no brainer.
If your credit score has improved substantially, which means you'll qualify for a lower interest rate.
When to Refinance a Car Loan
If you suspect you didn't get the best possible rate for which you qualified (this often happens at car dealerships).
Here's the other good news about car loan refinancing. Some of the biggest players in the field are credit unions, who also happen to be some of the most fair-minded, affordable players in lending. I love it! If you are not currently a member of a credit union, don't despair. It's not as hard to qualify as it used to be. Check out www.FindACreditUnion.com.
Heaps even piles on with some math, explaining that if you took out a five-year car loan at 7.75 percent interest and you've got four years left, you can save $1,373 over the life of the loan if you get the interest rate down to 4.75 percent; $906 if you nab a rate of 5.75 percent; and $448 if your new interest rate is 6.75 percent.
Here's where I have to throw in a couple caveats. The real way to SAVE BIG is to pay cash for a car.
For those who can't afford to pay cash -- yet -- I recommend an auto loan of no more than two years. You don't want to pay interest on a depreciating asset for too long. Having said that, if you are already in the middle of a five-year car loan -- the most popular car-loan term in America -- then you should certainly try to scoop up any savings you can. I suggest you use those savings to start saving for your next car, so you will be able to pay cash in the near future.
I also caution you not to use the refinance as an excuse to extend your loan. If you have four years left on your five-year car loan, don't refinance into another five-year loan. Instead, get a four-year loan. Or, better yet, use the savings you achieve from the new interest rate to refinance into a more aggressive two- or three-year loan. If you do that, you will be paying interest for fewer years and will save even more money.
Share Your Ideas for Saving Big
Make sure your current loan doesn't have a prepayment penalty. And bear in mind that not all vehicle owners qualify to refinance. If you owe more on the vehicle than it's worth, that will likely disqualify you and often lenders don't want to take a chance on older vehicles.
Fun stuff! Do you know of a way to SAVE BIG -- more than $1,000 in less than a year -- that might wow me? Think you've got one I've never heard of? I will curse you and admire you! Bring it on! Write to me by clicking here.