Why You Shouldn't Refinance Your Auto Loan

NEW YORK (MainStreet)—Low interest rates are driving some consumers toward the option of refinancing their auto loans since many people are keeping their vehicles longer.

Refinancing the loan for your cars or trucks is a relatively easy process since the loans are for shorter periods and smaller amounts compared, say, mortgages.

Some consumers are considering the option so they can reduce their interest rate or the cost of borrowing while others want to slash their monthly payments, said Karl Brauer, senior director of insights for Kelley Blue Blue Book, the Irvine, Calif. provider of new and used car information.

Although interest rates have risen recently, the current rates are still "quite low" compared to rates from two to four years ago, he said.

"If a consumer got a car loan a few years ago--and assuming their credit rating is as good or better than it was back then--they can likely get a lower rate today," Brauer said.

If you bought your new or used car within the past year, refinancing is not likely to be a good option, he said.

"Since rates have gone up recently, compared to the historic lows they were at through early June, it might be difficult for a consumer to get a lower rate now if their existing car loan was established in the past year," he said. "Car loan rates are still very low, relatively speaking, even with the recent bump up in overall loan rates."

To ensure refinancing your loan is successful, consumers need be able to reduce their interest rates by 3 to 6% or avoid the option, said Greg McBride, a Bankrate senior financial analyst based in North Palm Beach, Fla.