Let’s be honest; the economy is in a strange place right now. Inflation is still incredibly high and interest rates are increasing.
It can be confusing to know what to do with your finances right now and you might be wondering, “Should I refinance my car?” You may be surprised to hear that now is actually a great time to refinance your car loan.
Here’s why now is the perfect time to refinance your car loan and how you can decide if it’s right for you.
Will interest rates go up in 2022?
Before we go into what will happen to car interest rates in 2022, let’s talk about how we got here.
In March of 2020, the Federal Reserve read the writing on the wall with COVID. They anticipated an economic shutdown, so they did what they could to curb economic collapse. And part of that plan included slashing interest rates. They did this so that people would be encouraged to spend their money and the economy would keep moving.
The Fed lowered the fed funds rate, which is used as a benchmark for short term lending and other consumer rates. They lowered the rate from a range of 1% to 1.25% to a range of 0% to .25%. And this worked; it helped a ton of people who were strapped for cash. It also motivated people to spend their money and not sit on it. It encouraged everyone to keep active in our economy.
While people were encouraged to spend, they were not necessarily working. COVID restrictions meant that many businesses had to close, while illness and quarantine kept open businesses short-staffed. This created an imbalance in the supply chain–an increased demand for items and the decreased ability to supply those items. This, coupled with a few other factors, caused extreme inflation. Inflation ballooned from the 2% target to over 8% by 2022.
It became clear that intervention was needed to again curb an economic disaster. So the Fed announced earlier this year that they would be raising interest rates throughout the year to try to correct the supply and demand imbalance.
Will car interest rates go up in 2022?
So we know that the Fed is raising interest rates throughout the year. But what does this mean specifically for car loans? Most likely rates will increase as the year goes on, but there is good news! Since the car industry is notoriously competitive, car loan rates tend to be less sensitive to other rate hikes. This means that while they will likely increase, they will hopefully not be as drastic as other rate hikes.
Since we know that interest rates will most likely rise, time is of the essence when it comes to any financing decision. And that goes for car financing decisions as well. If you have ever thought about car refinancing, now is the time.
Is it time to refinance your car loan?
How do you know if the time is right to refinance your car loan? Ask yourself the following questions to find out.
Has my credit score increased?
Refinancing will save you money if you can refinance to a lower car loan APR. And the best way to get a good car loan APR is to have a good credit score. If your credit score has improved since your initial financing, it’s definitely a good time to think about refinancing. Increasing your score even slightly will increase your chances of securing a good car loan APR (which can save you hundreds, even thousands, every year). You can increase your credit score by committing to the following:
- Check your credit report for any errors or inconsistencies
- Commit to making full, on time payments (set up auto pay–this can help a great deal!)
- Keep your credit utilization score ratio below 30%
- Request higher credit limits
If your credit score has increased (or you are actively working on increasing it), it might be a good time to refinance your car loan.
How much time is left on my loan?
Before you commit to refinancing your car loan, think about how much time is left on your current loan. Experts suggest that refinancing when you have at least two years left on your loan will result in the most amount of savings. This is because car loans are front-loaded amortized loans, so in the beginning your payments are mostly going towards your interest. This means that the earlier you refinance, the more money in interest you will save.
Are there prepayment penalties on my current loan?
Many car loans have prepayment penalties that are designed to deter you from refinancing. After all, if you refinance, they are losing out on interest payments from you. Be sure to read your current contract and know what the fees are. In some cases, the savings from refinancing might still outweigh any prepayment penalties. If you are unsure of what your prepayment penalties are, call your current lender and have them walk you through it.
If you don’t have a lot of time left in your loan, the prepayment penalty fees may outweigh the savings. Make sure you do the math and figure out what your potential savings could be with refinancing. Auto Approve can help show you how much money you can save–head over to our quote page to get started!
Does my car qualify for refinancing?
You must also consider if your car qualifies for refinancing. Most lenders have general requirements for refinancing a loan. Lenders tend to look at:
- How old your car is
- How many miles your car has
- How much money is left on your loan
Most lenders require that your car is less than ten years old and has less than 100,000 miles on it. As your car gets older and depreciates more and more in value, the harder it is to refinance.
Do I need a little breathing room in my finances?
Refinancing your car loan can give you a little breathing room if your budget is a bit too tight these days. Securing a lower APR and changing your payment schedule (for example lengthening it from 36 months to 48 months) can reduce your monthly bill drastically.
That’s how you can decide if now is the right time to refinance your car loan.
Refinancing your car loan can save you a lot of money, and the sooner you start the process the sooner you can start saving money. Interest rates are only going to increase, so the time to refinance is now.
Don’t wait any longer – get started with Auto Approve today to get your free quote!