Despite Fed Rate Hikes, Auto Refinancing Remains Competitive, New Study Says

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The 0.25% benchmark interest rate hike announced by the Fed on March 16, 2022, has many consumers revisiting their debt to cut costs in the coming months. With that comes an increase in auto loan refinancing, according to a new survey from RateGenius.

In spite of the interest rate hike, the study shows, drivers are able to reduce auto loan interest rates by more this year than in 2021. The average auto loan interest rate climbed to 5.55% in March, but that’s still well below the 6.23% average in March 2021. That means consumers can reduce their interest rates by an extra 0.26% by refinancing compared to last year.

The RateGenius study found that the average interest rate savings for consumers who refi is 7.36%, leading to an average savings of $78.76 on their car loan payments. Of course, your results may vary based on your credit score and the terms of your loan.

“For borrowers seeking creative budgeting strategies to help cope with rising costs, refinancing can be an effective debt payoff tool. Right now, borrowers are cutting their auto loan rates by more than 7% on average. It’s likely we’ll see that go up as inflation and interest rates continue to climb,” said RateGenius CEO Seth Meyer in a press release.

RateGenius shared the average interest rates for March 2022 based on credit tier and loan terms:

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Credit Score 36-month term 48-month term 60-month term 72-month term
750+ Excellent 2.91% 3.18% 3.20% 3.69%
700-749 Good 3.59% 4.41% 4.07% 4.42%
640-699 Fair 5.30% 6.74% 6.25% 6.29%
<640 Poor 7.00% 9.54% 9.09% 9.05%

Is Refinancing Right for You?

Whatever your credit score and budget situation, refinancing could be the right choice, Meyer said. He urges borrowers to look at their goals, whether it might be a lower interest rate, lower monthly payments, or even a cash-out refinance to pay off other, higher-interest debt.

“Compare your auto loan to current auto refinance rates, and use a refinance savings calculator to determine your savings,” Meyer told GoBankingRates in an exclusive email interview. “Borrowers are saving well over $1,100 per year (on average) on their auto loan payments.”

What You Need to Know Before You Refinance

Meyer likens the process of refinancing a car loan as similar to refinancing a mortgage. While you will need to provide basic personal information that would be used for a personal loan, such as your credit score, income, and debt obligations, the condition of the car and its loan-to-value ratio also comes into play, just like when you’re refinancing a home loan.

“Lenders are most concerned about whether you’ll be able to pay back the loan, so they look beyond credit to determine that. For example, since refinance loans are secured by the collateral (the car), they’ll want to assess your vehicle’s condition and confirm if it’s registered and insured,” he told GoBankingRates.

Lenders also look at the loan-to-value ratio, or how much the car is worth compared to how much you owe on the loan. Since cars depreciate in value, however, lenders will typically accept a maximum LTV of 125% to 135% for a car re-fi. Home loans, on the other hand, typically require the borrower to maintain equity in the home.

Auto re-fi loans also allow for a higher debt-to-income ratio than mortgage refinancing, Meyer explained, noting that you can have a DTI as high as 50% and still be approved for a low interest rate auto re-fi loan.  

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How (and When) to Get Started with Your Auto Re-Fi

It’s never too early to refinance your auto loan, Meyer said. “You can refinance as soon as right after you’ve purchased the car. The most common time that people are actually refinancing is right after they got the loan from the dealership,” he said.

Banks and credit unions often have lower interest rates than auto dealers, but there is a level of convenience associated with using the dealer’s lender at first to “sign and drive” your car off the lot.

Once you’ve made the purchase, you can start checking rates on re-fi loans without hurting your credit score. “It doesn’t hurt your credit to start looking,” Meyer said, pointing to the website Loan Finder as one tool that lets consumers view refinance estimates without a hard credit check.

“Many services allow you to see your credit score so you can have an idea what credit tier you fall under,” he added.   


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