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  • Nicholas Hinrichsen

Refinance your car loan, no need to wait for lower rates

Updated: Aug 13

Have you read Co-Chief Investment Officer and Co-Chairman of Bridgewater Associates, Ray Dalio’s recent article 'The implications of hitting the hard 0% interest rate floor'? It’s a fantastic article written in reaction to the Federal Reserve Board’s decision to drop the short-term benchmark interest rate to 0%.

The drop to 0% led to applications for mortgages and refinancing to skyrocket to their highest level since 2009. The rise in applications makes sense - when rates decrease it’s only logical to take advantage of the better offering through refinancing.


However, although refinancing is common with mortgages, many borrowers do not think about refinancing their auto loans as well. We therefore conducted this study to better understand if car owners need to wait with refinancing until the FED drops its rates.


Table of contents

  1. How do interest rate drops impact car loans?

  2. Interest rate savings: lower rates vs. dealer mark-ups and improved credit

  3. How to refinance your auto loan and save thousands of dollars

How do interest rate drops impact car loans?


In short, when interest rates decrease then auto loan rates will mirror this change. Just like for mortgage, a drop in interest rates is a great opportunity to reduce your monthly auto loan payments. The FED typically lowers interest rates to encourage consumers to borrow, which in turn boosts the economy.


However, when looking at auto loans, we found that a drop in interest rate is only a secondary reason for refinancing. Instead, we identified two drivers that make refinancing your auto loan even more attractive:


  1. Lower interest rate level following action from the FED, as described above.

  2. Car dealerships have marked up their interest rates as described in 'How much dealers make, how to get thousands back'.

  3. You improve your credit score, as examined in our blog 'The best way to lower your rate? Make your payments!'.


Interest rate savings: lower rates vs. dealer mark-ups and improved credit


The below chart is based on an in-depth 30-year study on U.S treasury rates and the respective interest rate changes implemented by the FED. As you can see, in the early 90s treasury rates were over 8% - borrowing money was very expensive!


Rates have steadily decreased to the 0% since then. A rate decrease is a significant change, yet in relation to auto loans, it’s not a primary driving factor for refinancing. As the graph shows, the biggest rate drop was in 1992 when the FED dropped the rates by 1.14%. The biggest cumulative drop over a five year period (the same term of an average car loan) was 2.89%.

If we apply these figures to an average five-year car loan, borrowers can at most expect an interest rate decrease somewhere between 1.14% and 2.89%. Even the highest imaginable interest rate drop therefore pales by comparison with the typical loan rates of car owners who don't have expectational credit. For some context, auto loan rates for borrowers with challenged credit can be up to 30%.


How to refinance your auto loan and save thousands of dollars


As we demonstrated in our blog 'The best way to lower your rate? Make your payments!', being disciplined with your payments can improve your interest rates by much more - up to 10% in some cases.

Moreover, dealers often mark-up the rates on loans, especially on loans for people with challenged credit. We took a closer look at the changing tactics dealers are using in our blog 'How much dealers make, how to get thousands back'.


Therefore, refinancing your car is definitely a great idea and you shouldn't wait any longer. Falling interest rates is a very beneficial factor and will give some tailwind when refinancing your auto loan - but you don't have to wait for it: the real drivers behind the opportunity are dealer mark-ups and improved credit scores.


The most advantageous reasons for lowering your monthly payments, therefore, lie directly in your control. By being disciplined and making your payments on time, you can significantly improve your credit score and reduce your interest rates.


WithClutch.com is a fully digital platform that lets car owners like you do so from the comfort of their own home. No need to set a foot in a bank or credit union. You can lower your rate or get cash in as little as 20 seconds.


Follow three simple steps to refinance your auto loan, get approved in seconds and save thousands in minutes.


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