Car loan rates have been at historic lows the past few years as our economy has been navigating uncharted territories. But as we try to get out of our current inflation situation, interest rates have been increasing across the board. So what does this mean for the future of car refinance?
In order to understand what is happening with auto loan rates, we have to talk about what the Fed does. This is a complex question, as the Fed does a lot. The Fed has three major responsibilities:
The Fed’s two major priorities are to maximize employment and stabilize prices. One of the main ways the Fed accomplishes this is by setting the benchmark rate. The benchmark rate, or federal funds rate, is the interest rate set by the Fed that affects all borrowing within the US. This rate affects certificates of deposit, savings accounts, credit card rates, mortgages, and more.
If the economy is a bit slow, or predicted to be slow, the Fed will lower this rate to encourage more spending in the economy. When rates are low for savings, such as savings accounts and certificates of deposit, consumers have less of an incentive to save their money. And when borrowing rates are low, consumers are more incentivized to take out loans and make more purchases.
But this sort of action can have unintended consequences, which is where we find ourselves now. When the Fed lowered the rate in reaction to the Covid shutdown, it encouraged spending but also helped contribute to inflation.
Inflation has many root causes and there is no simple answer as to why inflation has skyrocketed in the past year. There are many reasons and they are all related to supply and demand. These causes include:
Inflation is a very complicated issue, but the reaction to inflation is usually to increase interest rates, which is what the Fed has been doing steadily throughout 2022.
Auto rates in 2022 are reacting to the increased Fed rates, but not as much as other industry interest rates. This is because the auto industry is in general a little less sensitive to the Fed rate as other industries, such as the housing market.
But 2022 auto loan rates are increasing. It’s hard to say how much they will rise by the end of the year, but they are expected to continue rising until inflation slows significantly.
It is an expensive time to buy a new car. The global chip shortage caused a major slow down in the production of new cars, and this has led to a reduced supply. Inflation for both new and used cars is thus at an all-time high. Combine that with an increasing Fed rate and you are left with an expensive and inflated car market.
But auto loan rates are not solely dependent on the market rates. They still heavily depend on your personal finance history including your credit score and your income. So while it is an expensive time to buy a car, that doesn’t mean that it is necessarily a bad time for you.
Since everything in the US market is inflated, it’s never been more important to save money where you can. And a great way to do that is by refinancing your car loan. There is still a good chance that you can qualify for a lower car loan APR. It is a good time to refinance a car loan if any of the following apply to you.
Your credit score is one of the major factors in the car loan APR you will be offered. Your credit score may have increased for any of the following reasons.
It is a good idea to check your credit report and ensure that everything is accurate and correct. You can check your report one time per year at each of the three credit reporting agencies, and you should be sure to take advantage of this. Check that all of your payments are properly recorded, your debts are accurate, and your personal information is correct. Inaccuracies in these areas may cause you to have a worse credit score than you actually have.
If your credit score has not increased since your initial financing, it’s a good idea to take some time to work on building your credit score before applying for a car loan refinance. You will secure a much better car loan APR if this score is high.
Car loan refinancing is more beneficial the earlier you pursue it. When you refinance a car loan, the intention is to reduce the interest you will pay. Car loans are structured so that the interest is paid mostly towards the beginning of the loan. This means that the longer you wait to refinance, the less money you will save in interest. Experts recommend having two years or more left in your current loan to maximize the benefits of refinance.
Some car loans have prepayment penalties built into their contracts. This is to dissuade someone from paying off their loan early–after all, if you pay off your loan you will spend less on interest. Prepayment penalties vary greatly from lender to lender, so be sure to check the terms of your loan.
If you do have a prepayment penalty, sit down and do the math to determine whether or not it is worth it to refinance. If the savings of refinance do not outweigh the penalties, then refinancing is not a good idea for you.
Refinancing can help reduce your monthly payments by reducing your car loan APR. But it can also help reduce your payments if you stretch out your repayment period over a longer timeframe. Let’s say you initially financed your car for 36 months and you are struggling to make the payments every month. If you were to refinance that loan over 48 months, you would have 12 extra months to make payments on the same principal. While you will end up paying more money in the long run (you will be paying interest for an additional 12 months) this can greatly reduce your monthly payments and give you the breathing room you need in your monthly budget.
Refinancing is all about timing–and right now, the time is right. If you have been thinking about refinancing your car loan for some time, there isn’t much time left to wait. Auto loan rates will continue to increase throughout the year and possibly into next year. Refinancing now can ensure that you will get the best rates possible.
At Auto Approve, we specialize in car loan refinancing. That means we know how to get you the best car loan refinance possible. So don’t wait any longer–get in touch today for a free quote and start saving!