Refinancing auto loan might not be worth it

Cutting out a string of cafe lattes could easily save you $15 or $20 a month. So could cooking pasta instead of grilling a couple of nice steaks.

What kind of dough could you save on your car payment?

Would you refinance your car loan to save a Jackson each month? Over time, sure, the savings could add up to a couple Benjamins for a full year for many car owners.

But is it worth it?

Credit unions, as well as some banks, are promoting the idea of reducing your rates by refinancing your car loan.

The idea sounds intriguing now that used-car loan rates are at attractive, single-digit lows.

These days, many people are looking to save some coin wherever they can to cope with gas around $4 a gallon and rising food prices.

A few folks may even turn to refinancing the car -- instead of the house -- as a way to tap into equity in the car and pay down higher-rate credit card debt or remodel the house.

Banks and credit unions want you to refinance because they want your business. Think of the car re-fi as harkening back to the days when banks handed out free toasters to snag new customers.

"As any lender today, we're looking for qualified borrowers," said Robert L. Kudla, senior vice president of lending for Co-op Services Credit Union in Livonia, Mich.

Low car-loan rates are eye-catching. But if you're borrowing a few thousand dollars, you are not going to save $50 a month if you refinance a car loan.

Take a $10,000 48-month car loan.

The payment would drop by about $18 a month if you went to a 4 percent rate from an 8 percent rate.

A few variables will influence the new-car loan rate:

--Your credit score. Many times to get the best rates, you're going to need a score of 720 or higher.

--Your car's age. If you're driving a 2003 model, you're looking at a higher rate. But if you've got a model of 2008 or younger, you'd get a lower car loan rate.

Ohio-based Huntington Bank, which is offering refinancing, says its car loan rates would range from 4.99 percent to 7.99 percent for a five-year car loan on a newer used car; the rates would range from 5.75 percent to 8.74 percent on a 36-month loan for a 2003 model year.

"It's all going to depend on the customer's credit score," said Steve Korody, consumer loan specialist for eastern Michigan for Huntington Bank.

Korody noted that some consumers who have 20 percent rates on their credit cards, though, are able to refinance that car, tap into the equity and pay off credit card debt at a lower rate. Essentially, you're consolidating credit card debt on the car.

You would need to be disciplined, close a credit card, and not build up more credit card debt for that kind of strategy to work, Korody said.

Some consumers could have a better credit score or be able to borrow at a lower rate than they could a few years ago during the depths of the recession.

Hank Risley, senior vice president for retail lending for Ionia, Mich.-based Independent Bank, said many consumers are saving about $20 a month or more refinancing a car loan.

"Twenty dollars; I guess it's not dinner out for two," he said.

But he noted the savings add up and would amount to nearly $1,000 after four years.

How some consumers really save, he said, is when they pay off a credit card or another loan at 20 percent or higher when they refinance a car loan at less than 5 percent and borrow against the car.

Consumers, obviously, do need to realize that the lowest promotional rates won't apply to everyone.

Kudla said a car owner with a loan rate in the range of 5 percent to 7 percent could save money by refinancing now to rates as low as 2.99 percent for some vehicles.

But, again, who could qualify for 2.99 percent?

Kudla noted that a borrower would need a credit score of 720 and higher, a loan term of up to 60 months and agree to have the monthly payment made automatically through a credit union checking account at Co-op Services.

Mike Kruczek, chief lending officer for credit union DFCU Financial in Dearborn, Mich., said refinancing used cars has grown a bit in popularity, especially for 2006, 2007 and 2008 models, as rates have fallen in the past year.

The lowest rate that consumers can get on an auto loan refinance at DFCU is 3.89 percent for 60 months, which includes qualifying for a special patronage dividend and discounts.

Some consumers refinance their car loans to save even a few dollars a month.

Jeff Meadors, 37, of Howell, Mich., said he refinanced his 2008 Pontiac Solstice "basically to save a buck."

He's not saving a lot of money each month. But he went from a 4.99 percent rate that he got on the used car last October to a rate of 4.74 percent at DFCU Financial.

"I didn't go from a huge high rate to a low rate," he said.

But the new loan also enables him to pay the car off quicker, since he went from a 60-month auto loan to a 48-month auto loan in the process.

"I'm just money-conscious. I hate paying the interest every month," Meadors said.