Refinancing your car can be a very beneficial move for you. But how do you know when the timing is right? Today we are talking about trends in the auto finance industry and how you can decide if refinancing your car loan is a good idea.
Let’s talk about the auto finance market for a minute.
Four times a year Experian releases a State of the Automotive Finance report which outlines a number of statistics about how we purchase and finance our vehicles. In the fourth quarter of 2021, this report gave us some interesting facts.
In Q4 2021, the average new car loan was $39,721. This is up from $35,421 in Q4 2020.
In Q4 2021, the average monthly car loan payment was $644. This was up from $579 in Q4 2020.
In Q4 2021, the average loan rate was 3.86%. This is down from 4.3% in Q4 2020. And this is down from 5.26% in Q4 2019.
In Q4 2021, the average loan repayment period was 69.66 months. This is up slightly from 69.63 months in Q4 2020.
There are a number of lessons we can glean from these numbers. First off, we are spending significantly more per vehicle purchase, upping our average price tage by over $4,000 in just one year. This is, not surprisingly, causing our monthly payments to increase significantly by over $60 per month.
BUT it also means that interest rates are lower than ever. In one year the average loan rate dropped by over .4%, which is pretty significant in the world of auto finance.
So what does this mean for someone who already has a car loan? Well, it means that your chances of finding a lower car loan APR are very good. And that can translate to saving you quite a bit of money.
Let’s talk about some reasons that refinancing your car loan might be a good idea.
There are four main reasons why refinancing your car loan may be a good idea.
As we went over before, the market rates are down significantly. The average APR is down over .4% from 2020 and down over 1.4% from 2019. Even if your credit score hasn’t changed, you may qualify for a lower car loan APR.
If your credit score has increased since your initial financing, you could stand to get a much, much lower APR when you refinance. Your credit score may have increased if any of the following apply to you:
You have made consistent, full, on-time payments
You have had a negative event expire (like a bankruptcy)
Your credit limit has increased
You haven’t had a lot of credit inquiries
Your credit utilization score has increased. This ratio is determined by adding up all of your credit card balances and dividing it by your available credit. This number should ideally be less than 30%
Check your credit score and compare it to the score you had when you initially applied. If it’s either the same or better, you should look to refinance your car loan and get a lower car loan APR.
The average repayment period for a new car is almost six years. This is a long time to have a loan on a car. Keep in mind that cars depreciate faster than most assets, and this makes it all too easy for us to become underwater in a car loan.
If you are conscious of this, you may want to prioritize paying your car off faster. And refinancing your car can help you do this in the most money-conscious way. You can of course make extra payments on your existing loan, so long as they do not charge you prepayment penalties. But you can save much more money by refinancing your car loan to a lower interest rate and changing the repayment period. Interest rates tend to decrease when your repayment period decreases, and increase when your repayment period increases.
Refinancing your car loan will allow you to lower your interest and pay off your car faster and more efficiently.
If your finances have changed for one reason or another, you may be having trouble making your monthly car loan payments. Refinancing can allow you to lengthen your repayment period, which will lower your car loan payments every month. It’s important to keep in mind that this usually means you will be paying back more money overall for the duration of the loan, unless you are able to drastically reduce your interest rate as well.
Adding or removing a cosigner to your loan is a very common reason to refinance, whether the reason is personal or financial. You cannot simply add or remove a cosigner from your existing loan, so refinancing your car loan is your best bet to amend this.
Adding a Cosigner
Adding your friend or partner to the loan can secure you a better interest rate and reduce your overall payments, since you will be splitting the monthly cost. The lender will consider your joint income and both of your credit scores when determining an interest rate. If times are tough for you financially, this might be a good option for you if you have a friend or partner who is willing to do so.
You might also want to add your child as a cosigner to help them build their credit. It’s difficult to start building credit as a young person, and refinancing your car loan and adding them as a cosigner is an easy way to do so.
Removing a Cosigner
Refinancing your car loan is also necessary if you want to remove a cosigner. Maybe you had a cosigner on the original loan because your credit wasn’t the best, but you don't need the help anymore. Maybe you were in a relationship that has now gone south and you need to separate from that person financially. Either way, refinancing your vehicle will allow you to sever that financial relationship.
Refinancing your car loan sounds like a great idea, but when is the best time to do so? What should you consider when it comes to the timing of your refinance?
If you either just bought your car or just refinanced your car loan, you will have to wait 60 to 90 days until all of the paperwork is filed and settled. There is no amount of time that you need to wait, you simply need to wait until the paperwork is complete so that you can restart the application process.
Again, there is no amount of time that you need to wait to refinance your loan, but you may find it to be more beneficial if you wait 6-12 months. Experts recommend this because it will allow you to make consistent, on time payments to your current lender, which will help your credit score and make you more desirable for prospective lenders. It will also give the new credit inquiries a chance to fall off of your credit report. All of this will give you a better chance of securing a lower car loan APR and making the car loan refinance loan worth it.
If you have less than a year left on your current auto loan, it will most likely not be worth it for you to refinance your vehicle. There’s also a very good chance that lenders will not want to refinance with you.
This is because car loans are front loaded amortized loans, meaning that in the beginning of the loan you are paying mostly interest, and towards the end of the loan you are paying mostly towards principal. The earlier you refinance, the more money you will save in interest. And the earlier you refinance, the more money the refinance lender will make off of you. Waiting too long will make refinancing a waste of time for both you and the lender.
Refinancing your car loan is a big decision, and Auto Approve is here to help. We have relationships with lenders from all across the country and can help you apply, sign, and start saving money today. Auto refinancing is our specialty, so you know you are in good hands with us. Don’t just take our word for it – our TrustPilot reviews show just how happy our customers are.
So don’t wait, take advantage of today's low interest rates and refinance with Auto Approve today!