A $20,000, 6 year car loan at a 10.4% rate equals monthly payments of about $375. After two years, the balance on the loan would be $14,657; but the consumer would still be facing $18,000 worth of payments ($375 for the next 48 months).
If the loan is refinanced at the point, the savings are dramatic. Payments would drop to $324 per month (more than $50 in savings!) and the total remaining payments drop to $15,552. That’s just about $2,500 over the life of the loan. Certainly well worth the call to a lender.
Granted, this scenario is for a nearly ideal auto loan refinancing candidate (this imaginary consumer went from subprime to prime borrowing status within 24 months), so it wouldn’t apply to everyone. It’s not impossible, but it’s not common.
Still, last year, Experian said there was $178 billion worth of outstanding subprime loans held by consumers. It’s a good idea to make a goal of reaching prime status. The ability to refinance into a much cheaper car loan can be a nice carrot to help inspire anyone to go through the process.
Now, let’s examine a consumer who might be tempted to refinance because she or he got a not-terribly-great-rate from their auto dealer. We’ll say this consumer borrowed $25,000 for seven years at a kind-of-ugly 4.5%. Those 3% refinance rates can sound attractive — and if we were talking about refinancing a home, a 1.5% rate drop would probably be worth it. But with a simpler, shorter car loan? Not so much.
The driver above would be facing 84 months of $348 payments. After two years, there would be $18,639 left on the loan. Refinancing that amount at 3% over the past 5 years of the loan would result in some savings — about $13 per month. That’s still about $780 over the life of the loan, but remember, that savings is spread over five years. Perhaps not worth the call.
When is it worth the time?
There are no solid rules, but consider this — for every $10,000 borrowed, a drop of 1 percentage point is worth about $5 per month over 48 months. Roughing out the subprime-to-prime example above: a 7% drop is worth $35 (times 1.5 because the balance is about $15,000) and there would be a bit more than $50 in monthly savings. But if the drop is from a 4% rate to a 3% rate, the savings probably wouldn’t be more than enough to buy you an extra tank of gas each year (depending on gas prices, of course).
But as the auto industry continues to encourage longer-term, higher-dollar-value car loans, the calculus toward auto loan refinances continues to tip in consumers’ favor, so it doesn’t hurt to ask.
Is refinancing right for you? Call and ask to speak with one of our loan professionals. Or apply online and have us give you a call.