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Should you refinance your auto loan?

[Jun 20, 2011.]


On average, Americans are changing their vehicles much less frequently than they used to. Back in February, The Columbus Dispatch quoted data from research firm Polk that suggested that, at the start of 2011, consumers were keeping new cars for 63.9 months. That's 4.5 months longer than at the beginning of 2010, and an increase of 14 percent compared with the end of 2008. That's an all-time record (at least since people began counting such figures), as is the 52.2-month average if you add used cars into the equation.

Auto loans: to refinance or not to refinance, that is the question

Some think that that's an argument for more people to refinance their auto loans. And it may be, at least if your loan amount is big enough and the term left to run on it is long enough. However, last month The Sun News ran an article under the headline, "Refinancing auto loans might not be worth it."

Susan Torpor, the writer, provided an example based on $10,000, 48-month auto loans. If you were paying 8 percent for one of those and were to refinance down to 4 percent (lucky you!), then you might think you'd be saving a fortune. However, in reality you'd only be $18 a month better off.

Of course, $18 is $18, and in these days of high gas prices, anything you can do to cut your costs is welcome. But $216 a year isn't going to get you very far, and there's the hassle of the--admittedly comparatively straightforward--paperwork to consider.

An alternative to refinancing auto loans

So here's an idea. Instead of refinancing the loan on your existing car, why not trade it in and get a different one? Of course, you should only do that if you can afford to, and are reasonably optimistic about your prospects. But, assuming you can and you are, let's count the ways in which this makes sense:

  1. You get to drive home in a new (or, if you're in the pre-owned market, a different and better) car.

  2. Assuming you shop around, you could find rates on auto loans that are extremely low by historical standards.

  3. A new or better car may well turn out to be cheaper to maintain.

  4. You could choose a model with better fuel economy so you're less concerned about gas prices.

  5. You're unlikely to need or wish to trade in your new/better car as quickly as your existing one, so you could enjoy the low rates on your new loan for longer.

Auto loans could get more expensive

That last point is especially important. When the Federal Reserve published its latest consumer credit statistical release on June 7, it included some data on interest rates for auto loans. And, at least for new car loans at auto finance companies, these are creeping up. In fact, during the first quarter of this year, they were higher than they were on average in 2009 and 2010.

They're still great bargains by historical standards, but many economists believe that rates in general are likely to rise as the economic recovery gains traction. If that turns out to be correct, then the longer your auto loan lasts at today's rates, the better off you may find yourself.

If you think that now's a good time to trade in your car, then find yourself competitive quotes for auto loans on this site.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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