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Car loans: Is is time to refinance?

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Seth Perlman/AP/File

(Read caption) In this June 2012 file photo Dodge cars are for sale at an auto dealership in Springfield, Ill. According to a recent survey, a whopping 63 percent of auto owners have no idea that it's possible to refinance a car loan.

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With interest rates hovering near record-lows, plenty of homeowners have chosen to refinance their mortgages. But auto loans can be refinanced, too -- the only problem being that most people don't know it.

That wee bit of info comes from a new survey released by CarFinance.com, which makes its profits from facilitating auto loans, so it's got a not-so-secret interest in spreading the word. That being said, the site's survey data does highlight the fact that refinancing an auto loan is possible, and in some cases, it's well worth a borrower's time.

CarFinance.com surveyed 2,000 adults in June and July of this year and found that a whopping 63% of respondents didn't know that they could refinance a car loan. In all, just 12% of those who took part in the survey said that they'd refinanced an auto loan in the past.

Should you refinance?

As most of us remember from the Great Recession, when banks began failing in 2008, credit became much harder to get. (That, in turn, facilitated the downfall of car companies, since fewer people could take out auto loans.)

Though we haven't returned to the freewheeling days of the early 21st century, when credit flowed like water to borrowers across the credit-rating spectrum, it's now much easier to qualify for a loan than it was just a year or two ago. Here's a quick checklist, to see if refinancing is right for you:

1. Read the fine print: Just as with mortgages, some car loans come with stiff pre-payment penalties. If that's the case with your auto loan, it might not be worth your time to refinance, unless you're carrying a very large balance and making hefty monthly payments.

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Also, check to see that your auto loan wasn't calculated using the dreaded "Rule of 78s", which applies early payments in the life of a loan to interest, and later payments to principal. This method is becoming less common, and in some states it's illegal. If your loan fits the bill, though, it means that little of the cash you've shelled out so far has gone toward bringing down your balance.    

2. Review your credit: Several years ago, the federal government passed a law that requires credit agencies like Equifax, Experian, and TransUnion to give Americans a free copy of their credit report once a year. If you haven't already gotten yours, you can do so at AnnualCreditReport.com. Give it a thorough look to ensure that everything's up to date and that there are no inaccuracies. If something's amiss, dispute it.

Of course, getting a copy of your credit report isn't the same as getting your credit score, which is the grading system on which borrowers are evaluated. There are several different types of credit scores, but FICO remains the most popular. Unfortunately, to get your FICO score, you'll need to shell out dough -- though you can get a rough idea of what that score might be at sites like CreditKarma.com. It's not the same as the FICO scale, but it's still useful.

Bottom line: if your credit has improved in the past couple of years, refinancing might be hugely advantageous.

3. Shop around: You could go to your bank to apply for a new auto loan, but it's in your best interest to get a wide range of quotes. Visit a site like LendingTree.com to apply to several lenders at one time. Then...

4. Do the math: While a new, low interest rate may seem alluring, the real numbers might not be so attractive. Use an auto loan calculator to compare your current payment schedule with your new one. Thankfully, unlike refinancing a mortgage, refinancing an auto loan doesn't involve massive application fees or closing costs, so you don't have to worry about those expenditures.

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