If you are looking to buy a new car, you may be wondering if now is a good time. Fortunately, car loan rates tend to be a little less sensitive than other types of loans. So even though the Fed has announced that it will be steadily raising rates throughout the year, they shouldn’t affect the car loan market too much.
The car market went through a strange year in 2021. While rates remained low as a result of the pandemic, there were supply chain issues that resulted in low inventory. Low inventory in turn led to increased prices. But while car prices increased, the interest rates decreased.
From the start of the year to the end of the year, car loan interest rates dropped from 4.24% to 3.92%. This actually fueled consumer demand further, leading to even more shortages. Long story short, it was a great time to buy a car, but not an easy time to buy a car.
The Fed announced early this year that it plans to gradually increase interest rates to help curb the ever-rising inflation that we are seeing. But as we noted before, car loan interest rates tend to be a bit more stable than other interest rates. This is because car loans are highly competitive, so they do not respond as drastically to market increases. So even though benchmark rates will rise steadily throughout the year, car interest rates will most likely not rise above 5%.
The problem continues to be with the supply chain. A global chip shortage has drastically slowed down production of new cars. New car availability is down about 65% over the last year, which makes buying a new car more difficult and more expensive. In fact, a Torque News survey reported that dealerships were charging between $10,000 and $20,000 over the sticker price for a new car.
So while timing is great from a financing point of view, timing is not necessarily great from a car price tag point of view. It might not be the perfect time to buy a new car, but it is the perfect time to refinance your car loan.
When rates are low but inventory is short, it means that it’s a great time to consider keeping your current car and refinancing your car loan to a lower rate. Consider refinancing your car loan if any of the following apply to you.
Dealer financing is very rarely a good idea. You see car dealerships are indirect lenders, which means they act as an inbetween for you and a bank or credit union. The financial institution handles the actual financing, while the dealership tacks on financing fees. So when you pay for dealer financing, you are really paying for the loan plus the added dealer fees. When people refinance their car loans from dealer financing, they report saving hundreds of dollars per year.
If your credit score has improved since your initial financing, you may be eligible for a much lower car loan APR. Your credit score is one of the most important factors in the car loan APR that you will be offered. Your score can increase for a number of reasons.
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%
All of these events can change your credit score and have a positive impact on the car loan APR that you are offered.
When did you get your initial car financing? If it was a few years ago, chances are the market rates have dropped since then. In fact, according to an Experian study, average car loan rates dropped from 5.26% at the end of 2019 to 3.86% at the end of 2021. That’s close to a 1.5% decrease in just two years. Cutting your car loan APR by that much can add up to a lot of money in savings.
If you are overpaying on your car loan payments (and trust us, you probably are), there are a few steps you can take to prepare for auto loan refinance. Here are our top tips to prepare for your refinance.
Give your credit score a little jumpstart before you apply for auto loan refinance. Request a copy of your credit report and review it carefully for any mistakes or errors, and report any inconsistencies immediately. Then look at all of your debts and see if there are any high interest accounts that you can pay down a little bit. Lessening your credit utilization ratio can help you increase your credit score. You can also improve your credit utilization score (and therefore increase your credit score) by requesting higher limits on your accounts.
Being as prepared as possible can help make the refinance process quick and easy. Gather up all of your necessary paperwork and upload it to make your application process as easy as possible. You will most likely need the following documents: photo identification, your social security number, proof of residence, your car’s information (make, model, year, mileage, and VIN), proof of income, proof of insurance, and your current loan information.
There are a lot of lenders out there that can refinance your car loan. From traditional banks, to credit unions, to dealerships, there are a lot of options. Using a company that specializes in auto refinance can help simplify this process for you and ensure that you are getting the best offers possible. At Auto Approve, you simply need to fill out some basic information, and we can handle the rest. From fast tracking your applications to helping you close the deal, Auto Approve can help you navigate the waters of refinance.
Get a free quote and start saving money today!