Refinancing Your Auto Loan

Why Refinance?

Refinancing your car will allow you to take advantage of several situations that may have come into your life such as lower interest rates in the market or an improved credit score since you purchased your car (resulting in a lower APR) or an improved job and income situation (which also can result in an lower APR). Car refinancing is rare because many people are usually upside down in their vehicle purchase and cannot refinance, but if you reach a point where you are no longer upside down through diligence or early repayment, you should look into refinancing your auto loan to more favorable terms.

What About Leasing?

It is probably best not to rely on the idea of a car lease any longer. Car leases were designed to function in an economic situation where a car's value could be more easily gauged and depreciation was easier to estimate, allowing the dealership to make money.

Car leasing works by auto manufacturers and dealers understanding a current, fixed price for a car and estimating how much that car will depreciate over the time that you will have the car on a lease. After your lease is up, they will turn around and sell the car wholesale to a dealership in order to recoup the difference between what you paid in leasing the vehicle and what they paid for the car plus the profit.

For example, if it cost a dealer $20,000 to make or buy a car in 2009, they know from past experience (or assume they know) that in 2 years that car is going to be worth $12,000. They would offer you a lease at that point for $12,000 plus the $8,000 plus whatever profit they wanted to make on the vehicle - let's say $2,000. So over the course of two years while you are leasing this car, you pay $10,000 for the lease of this vehicle, or roughly $416 per month. When you are done with the lease period, you give them back the car, now valued at $12,000, they sell it to the dealer for that amount and they walk away with a nice tidy profit and you can go get another new vehicle after only two years of payments for this one. But what happens if the vehicle isn't actually worth $12,000 after the two years? What if the value of the vehicle dropped to $8,000? The auto manufacturer or the dealer who made the lease takes a bath, that's what happens, and that is, unfortunately what has been happening a lot when it comes to car leases. This uncertainty has led many lenders and manufacturers to cancel their lease programs entirely or begin to charge rates for them so high as to scare away all but the most dedicated driver.

In addition, the fees associated with leasing can be a bear. You will be charged for driving more than a certain number of miles per year, or if you have a minor fender bender and ding the car, or if the car suffers more than the normal 'wear and tear' during the leasing period. These fees can add up rapidly and wind up costing you significantly more than you expected to pay or would have paid with a traditional car loan.

Have things you are still wondering about? Read our frequently asked questions for help with more answers and information.