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I've never had credit or a loan till recently when I bought a new car. This has recently given me a much better credit rating after having the loan for a year with 5 years to go and 2 credit cards with no late payment ever.

Is it in my best interest to try and get another loan with a better interest rate to pay off my current loan? Is this possible?

Right now my interest rate is 4.74% with $21,245.10 financed. So in one year I've paid just about $1000 in interest.

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I don't know what rates are available to you now, but yes, if you can refinance your car at a better rate with no hidden fees, you might save some money in interest.

However, there are a couple of watchouts:

  • Your original loan was a 6 year loan, and you have 5 years remaining. If you refinance your car with a new 6 year loan, you will be paying on your car for 7 years total, and you will end up paying more interest even though your interest rate might have gone down. Make sure that your new loan, in addition to having a lower rate than the old loan, does not have a longer term than what you have remaining on the original loan.

  • Make sure there aren't any hidden fees or closing costs with the new loan. If there are, you might be paying your interest savings back to the bank in fees.

If your goal is to save money in interest, consider paying off your loan early. Scrape together extra money every month and send it in, making sure that it is applied to the principal of your loan. This will shorten your loan and save you money on interest, and can be much more significant than refinancing. After your loan is paid off, continue saving the amount you were spending on your car payment, so you can pay cash for your next car and save even more.

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    Definite +1 for paying off faster - that's the key to lowering costs :) – Joe Apr 4 '16 at 20:37
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    Bullet point 1 is crucial. – quid Apr 4 '16 at 21:04
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    @Joe That's the most straightforward way to lowering costs. It is possible re-financing can save some more money, but it will require sitting down and calculating exactly how much you are actually saving, and requires knowing how to do said calculations. Paying off the loan faster will always save you money. (Unless investing could have given you higher returns, but... let's not go into that :) – Nelson Apr 5 '16 at 1:30
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    In bullet 1, you say that "you will end up paying more interest even though your interest rate might have gone down" (my emphasis). That is dependent on the actual interest rates of the old and new loans. For example, it's pretty clear that paying off a six-year loan at 0.00001% involves paying less interest (aproximately zero) than paying off a five-year loan at 5%. – David Richerby Apr 5 '16 at 2:00
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    "making sure that it is applied to the principal of your loan" - isn't this a placebo? – not_a_comcast_employee Apr 5 '16 at 3:45
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If it's possible in your case to get such a loan, then sure, providing the loan fees aren't in excess of the interest rate difference. Auto loans don't have the fees mortgages do, but check the specific loan you're looking at - it may have some fees, and they'd need to be lower than the interest rate savings.

Car loans can be tricky to refinance, because of the value of a used car being less than that of a new car. How much better your credit is likely determines how hard this would be to get. Also, how much down payment you put down. Cars devalue 20% or so instantly (a used car with 5 miles on it tends to be worth around 80% of a new car's cost), so if you put less than 20% down, you may be underwater - meaning the principal left on the loan exceeds the value of the car (and so you wouldn't be getting a fully secured loan at that point).

However, if your loan amount isn't too high relative to the value of the car, it should be possible. Check out various lenders in advance; also check out non-lender sites for advice. Edmunds.com has some of this laid out, for example (though they're an industry-based site so they're not truly unbiased).

I'd also recommend using this to help you pay off the loan faster. If you do refinance to a lower rate, consider taking the savings and sending it to the lender - i.e., keeping your payment the same, just lowering the interest charge. That way you pay it off faster.

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    "a used car with 5 miles on it tends to be worth around 80% of a new car's cost." When I bought my new car, it had something like 30-40 miles on it already, presumably from people taking it for test drives at the dealership. – Mason Wheeler Apr 4 '16 at 21:14
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    @MasonWheeler Sure, but it was still new, zero owners. That same vehicle used is instantly less. It even makes sense - if I bought a car and then sold it shortly thereafter, wouldn't you wonder if there might be something wrong with it that you don't know about (and might not be easily apparent)? – Joe Apr 4 '16 at 22:01
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    No, actually I wouldn't, because there are laws that protect people who get sold a lemon, and I would expect that if there were a serious problem with the car, the owner would return it to the dealership rather than try to sell it at a (rather significant) loss. – Mason Wheeler Apr 4 '16 at 22:55
  • Such as the driver running it into a lake? Not sure lemon laws would help there... – Joe Apr 5 '16 at 3:26
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Dude- my background is in banking specifically dealing with these scenarios. Take my advice-look for a balance transfer offer-credit card at 0%. Your cost of capital is your good credit, this is your leverage. Why pay 4.74% when you can pay 0%. Find a credit card company with a balance transfer option for 0%. Pay no interest, and own the car outright. Places to start; check the mail, or check your bank, or check local credit unions. Some credit unions are very relaxed for membership, and ask if they have zero percent balance transfers. Good Luck!

  • Question. How does one get a credit card with a limit that high to transfer over $20000+ to it? – Jason Jun 8 '16 at 22:23
  • Go with a top tier lender, must have a super strong fico. 700+. And have a healthy income on the application. To qualify, you can do it two ways. 1) try by yourself with no collateral applying directly with a creditor/lender/bank 2) Apply directly at a bank with a co-signer for a credit card. there's also a 3) option; if you have a property, you can take a line of credit against the house to pay for the debt at a lower cost, even if it's the same 3-4% rate, the car now becomes tax-deductible because your paying off mortgage interest; which means more tax deductions at end of the year. – Laythesmack Jun 8 '16 at 22:30
  • +1 for a great idea. What will be tough is both 0% interest and no fee up front. I made good use of this last year, but there was a 2% fee. Still 2% for a 15 month no interest loan made sense for what I needed. – JoeTaxpayer Jun 8 '16 at 22:30
  • Usually those offers are for superior borrowers with decent credit history and strong income and low debt. Not impossible. I saw these applications approved all the time. – Laythesmack Jun 8 '16 at 22:34
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Before we were married my wife financed a car at a terrible rate. I think it was around 20%. When trying to refinance it the remaining loan was much larger than the value of the car, so no one was interested in refinancing. I was able to do a balance transfer to a credit card around 10%. This did take on a bit of risk, which almost came up when the car was totaled in an accident. Fortunately the remaining balance was now less than the value of the car, otherwise I would have been stuck with a credit card payment and no vehicle.

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    How did transferring the loan to a credit card increase the risk? If you stayed with the 20% loan, would it then disappear because you totaled your car? – Nelson Apr 5 '16 at 1:34
  • Yeah. That is what insurances are for. – TomTom Apr 5 '16 at 2:33
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Your current loan is for a new car. Your refinanced loan would probably be for a used car. They have different underwriting standards and used car loan rates are usually higher because of the higher risks associated with the loans. (People with better credit will tend to buy new cars.)

This doesn't mean that you can't come out ahead after refinancing but you'll probably have to do a bit of searching.

I think you should take a step back though. 5% isn't that much money and five years is a long time. Nobody can predict the future but my experience tells me that the **** is going to hit the fan at least once over any five year period, and it's going to be a really big dump at least once over any ten year period. Do you have savings to cover it or would you have to take a credit card advance at a much higher interest rate? Are you even sure that's an option - a lot of people who planned to use their credit card advances as emergency savings found their credit limits slashed before they could act.

I understand the desire to reduce what you pay in interest but BTDT and now I don't hesitate to give savings priority when I have some excess cash. There's no one size fits all answer but should have at least one or two months of income saved up before you start considering anything like loan prepayments.

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    "I understand the desire to reduce what you pay in interest but BTDT and now I don't hesitate to give savings priority when I have some excess cash." How does reducing costs not constitute a savings? Also, how can you be so sure that the new loan, if having the same terms as the remainder of the existing loan, would count as for a "used car" (after all, it's still the same car, same owner, same everything except lender)? This answer frankly feels like a thinly veiled rant. – a CVn Apr 5 '16 at 7:35

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