Refinancing craze spreads to car loans

This post comes from AnnaMaria Andriotis at partner site SmartMoney.

Mortgages aren't the only loans consumers are refinancing: A growing number of borrowers are reworking the terms of their car loans.

Consumer applications to refinance car loans increased nearly 30% in January, to roughly 2,500, compared with a year ago, according to LendingTree.com's latest data based on the lenders in its network. The growth in refinancing is outpacing that of loan applications to purchase cars, which rose 10% in January and 15% in the fourth quarter.

Much of that demand is being filled by banks, experts say, though other lenders are also stepping in. For example, at dealerships in Connecticut, Massachusetts, Minnesota and Rhode Island, the number of these deals jumped by as much as a third over the past six months, according to Auto Refi Now LLC, which connects dealerships to consumers looking to refi in those states.

This latest data comes as car sales continue to rise. Chrysler reported a 40% increase in U.S. car sales for February, while Ford's rose 14% and General Motors' sales went up by about 1%. (Post continues below.)

For existing car owners, refinancing is becoming more appealing, says Alec Gutierrez, senior market analyst at Kelley Blue Book. Car loan interest rates continue to drop, and by refinancing, a borrower can lower the rate and in turn the monthly payment.

The average refinancing rate offered to borrowers is about 6.1%, down from 7.2% last year, according to Bankrate.com. Though the difference is small, the current refi rate is lower than the average rate a consumer would have gotten if he or she bought a new car three years ago.

It's also an opportunity for borrowers whose credit might have improved over the past few years to get a lower rate. And unlike refinancing mortgages, borrowers won't have to pay hefty fees to refinance their car loan, says Jesse Toprak, vice president of market intelligence at TrueCar.com, since most lenders waive origination fees.

To be sure, refinancing a car loan may not make sense for many car owners since a consumer could end up with a better deal by buying a new car. Interest rates on new car loans are cheaper -- about 5% on average, though dealerships are offering rates of about 1% to 2%.

Indeed, experts point out that lenders have their own incentives to refinance car loans. Banks pitch car refis in the hopes of attracting new customers with rates that -- while lower than what borrowers are paying on their current car loan -- are higher than consumers pay on mortgages, says Keith Leggett, vice president and senior economist at the American Bankers Association.

Dealerships, on the other hand, aim to establish relationships with customers who they hope will return to buy their next car, says Spencer Walters, owner of Auto Refi Now. In addition, he says, when dealerships are refinancing a car loan they often pitch add-on products, like an extended warranty that can range from $200 to $1,000 depending on the car, or accessories like a new set of rims or tires.

If car refis continue to rise, they could stymie future car sales growth, says Toprak. Consumers who refinance their car loans will likely hold on to those vehicles for at least the next two to three years, he says, which could lead to fewer people shopping around for a new car.

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