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How to Manage a Car Loan


Refinancing Your Car Loan

After driving your car for a few months, you might start to feel uncomfortable with your original loan. Maybe you got your loan from the dealer, and now you're finding yourself paying steeper-than-average monthly rates. Or maybe interest rates have dropped, or your credit has improved, meaning that you'll be able to secure a loan with better terms.

If any of the above is true, it's a good time to start thinking about refinancing your car. First things first, check to see if the car is worth more than the amount you owe. Do this by checking the value of your car in the Kelley Blue Book and comparing it to how much is owed on your loan. If your car is worth less than what you owe, you are said to be "upside down." Basically, being upside down means that your car is depreciating faster than you're paying it off. Should that be the case, your best bet is to hang on to the car and try to pay off the loan as quickly as possible.

If, however, your loan is still "right side up," you might consider refinancing. Start by shopping around for a better loan. If you obtained your loan with an auto dealer, you'll likely want to consider refinancing with a bank or credit union. Car makers make lucrative amounts of money off their financing schemes. Ford, for instance, generates more than 80 percent of its revenue from vehicle financing [source: Bradford].

If you already have debts tied up with a bank, the bank might be able to offer you the best refinancing rate. Credit unions, on the other hand, are non-profit and member-owned, which means you'll typically end up paying less than at a bank. Although credit unions are only responsible for roughly a fifth of all U.S. car loans, a credit union can typically offer rates up to 1.5 percent lower than banks [source: Credit Union Direct Lending, Dratch].

It's not always necessary to finance your auto with a tailor-made auto loan. You could decide to refinance with a home-equity loan. You'd get a lower interest rate, and the interest might be tax deductible. However, a home equity loan can also subject you to higher fees and increased risks: If you default on your car payments, you might be forced to sell your home.

When searching for refinancing, be careful not to shop around too much. If you inquire at more than three financial institutions, it could end up diminishing your credit score.

Read on to figure out how to conveniently bundle your car loan with other debts, and save on your interest payments at the same time.


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