You may know that paying more than the monthly minimum on your debt is a sure-fire way to not only pay off your loan faster, but it can also save you thousands of dollars in interest charges over the life of your loan. This extra money goes directly towards the remaining loan balance, also referred to as the ‘principal’ of the loan, and since the interest charges on your loan are calculated based upon this current balance each month, taking this approach can significantly reduce the portion of your payment that is being kept by the bank as interest. This will reduce the number of monthly payments remaining on the loan over time, essentially letting you keep that money in your pocket, rather than paying it to the bank in the form of interest.
However, if you, like most of us, aren’t in a position to pay more on your loan right now, refinancing your auto loan at a lower interest rate can allow you to attain the same savings. Refinancing to a lower rate of interest gives you the flexibility to keep paying the same amount and pay off your loan faster, or lower your monthly payments by adding some time to your loan, while still saving money in interest charges, even with a longer term.
Most people are aware that refinancing your auto loan can save you money, but let's look at some other ways that refinancing your current auto loan can put money back in your pocket.
Most of our clients have some sort of existing risk protection built into the total amount financed on their current loan. These products come in many forms, but the most common are GAP Insurance and Vehicle Service Contracts. If you’re not familiar with these protection plans, we encourage you to click on each link to educate yourself on some of the pros, cons, and common misconceptions that you often hear from sales representatives when purchasing or refinancing your car. What you may not know is that these products are always cancellable and refundable at any time!
That’s right! If you found yourself experiencing the all-too-common ‘buyer’s remorse’ that follows many individuals when that first payment is due, there is still hope! You may be able to not only lower your interest rate and payments by refinancing the loan through another lender, but you also may be due a substantial pro-rated refund on the unused portion of your VSC and GAP contracts. There are a few different ways to attain this refund, and it really depends on when you choose to cancel the plan. Here are a few steps we suggest you take to ensure you are making the right decision for your specific financial situation:
The easiest way to get this information is to check your Purchase Order that was provided by the dealership where you originally purchased your vehicle. This is usually a long piece of yellow paper that itemizes your transaction details (Purchase price, sales tax, trade-in allowances, documentation fees, and additional protection). If you have GAP, or any type of Vehicle Protection Plan (including Vehicle Service Contracts, Extended Warranties, Wheel, Tire, Glass, and Maintenance Warranties), it will be listed here with the overall cost of each product that was added to the total amount that you financed.
Now that you know how much you paid for protection, it is important to understand the amount of remaining protection you have left from these products. Your potential refund is dependent on the amount of time remaining on each product.
GAP Refund Example: Let’s say you were approved for a 72 month loan and you chose to add GAP coverage to that loan for a total cost of $895 (industry standard). This $895 was added to the total amount that you financed, but you are actually only paying for it as you use it each month.
Each month, $12.43 of your total monthly payment is being used to pay for the GAP protection. Now, if we fast-forward a year down the road, you have only used 12 months of the GAP contract, meaning you have 60 months of coverage left. If you decide to cancel the GAP today, then you should be due a refund of $745.80.
Since GAP contracts are written for each specific lender, it’s important to note that your GAP will automatically cancel if you sell your car or refinance the loan to another lender.
VSC Refund Example: You chose a 36 month, 36,000 mile VSC for $3000 (industry standard) when you bought your used vehicle.
Each month, $83.33 of your total monthly payment is being used to pay for the VSC. Sticking with the above example, let’s say you decide to cancel your VSC after 12 months. Although you have 60 months of coverage left on your loan, you only have 24 months of coverage left on the VSC. You should be due a refund of ~$2,000.
Now that you have calculated the amount of the refunds you should be due, you can decide if and when you’d like to cancel the contracts. You can call the dealership where you purchased the vehicle at any time while your GAP and Vehicle Service Contracts are still in effect to begin the cancellation process; however, you should consider the timing before you make the call.
If you decide to cancel the contracts before you’ve paid off your loan, then the prorated refund will be deducted from the remaining balance that you still owe to the bank. Essentially, this forces you to invest what could be a cash refund back into the existing loan.
On the other hand, if you wait to cancel the contracts after you have refinanced, then that cash refund is returned to you as a check in the mail to use as you see fit. You can choose to reinvest the refund into your new loan to pay off several thousand dollars of principal at a lower interest rate, or you can pay down some higher interest debt like credit cards, personal loans, etc. This is where refinancing your existing loan gives you more freedom and control over your monthly finances. It also gives you the opportunity to restart your VSC and GAP contracts on your new loan at a much cheaper rate than what you have been currently paying.
These refunds should happen automatically when the old loan has been canceled, but the responsibility is on you to call the dealership and get your refund. In summary, always make sure that you don’t leave money on the table when you choose to refinance your vehicle.
