Interest Rates Are Rising – Is Refinancing My Car Loan Still Worth It?
In response to rising inflation associated with the COVID-19 pandemic, the Federal Reserve has announced that it is raising interest rates in 2022. The interest hikes are coming in stages – rates went up 0.25% in March, and they’re expected to rise another 0.5% in both May and September.
The news that interest rates are rising has made many individuals reconsider whether they should refinance their car loan. Fortunately, these interest rate hikes will only have a minimal impact on the savings you’ll experience when you refinance a car loan. For the overwhelming majority of people, refinancing is still a smart decision, especially if you’re struggling financially due to onerous terms associated with your current loan.
What is the Impact of Fed Rate Increases on Auto Loans?
The Federal Reserve establishes the benchmark rate used by individual lenders when they set interest rates for their customers. When the Fed raises interest rates, this refers to the benchmark rate, not a specific rate you may receive when you refinance your car loan. There are a variety of other factors which impact the specific interest rate you’ll receive, including:
- Your credit score
- The type of vehicle you own
- The amount still owed on your initial loan
- And more
While these Fed rate increases may cause car loan interest rates to rise in general, your individual factors will dictate precisely how much you’re impacted by these rate hikes.
Rising Interest Rates are Less Impactful to Car Loans than Home Mortgages
These rate increases will have a significant impact on home mortgages for several reasons:
- The loan amount is very large (generally several hundred thousand dollars or more)
- There is a much longer term on these loans (typically 15-30 years)
As a result, even small interest rate increases ranging from 0.5% to 1% will equate to significantly more interest being paid over the life of your home mortgage. For example, if you have a $400,000 mortgage with a 30-year repayment term, a 0.25% increase in your interest rate will equate to approximately $20,000 in interest over the life of the mortgage. A 1% increase in your interest rate will add approximately $80,000 in interest onto your loan over 30 years.
Car loans, on the other hand, are much shorter term loans (typically 5-7 years). In addition, the total amount paid on car loans is much lower than on a home mortgage since cars cost significantly less than a home. Therefore, the additional interest accrued over the life of your refinanced car loan will be much less than the additional interest incurred on a mortgage.
Refinancing Your Car Loan Can Still Result in Significant Savings Despite Higher Interest Rates
At iLending, we’re able to help our customers achieve a significant reduction in their interest rate. On average, we’re able to help most people save close to 8% on average. Even with the upcoming interest rate increases, we’ll still be able to help most of our customers save approximately 7% when they refinance. If you’re going from an initial car loan with a 15% interest rate to a refinanced loan with an 8% interest rate, this will still equate to significant savings.
Let’s look at an example to illustrate the savings you can still expect to achieve after the interest rates rise. The average loan refinanced by iLending is $24,000 with a six-year loan term. Historically, iLending was able to refinance auto loans that resulted in an interest rate drop of 8% and a payment reduction of $145. Even though rates have risen, we are still able to refinance auto loans resulting in an interest rate drop of 7% and a payment reduction of $133. Bottom line is that many auto loans are egregiously overpriced, and rising rates barely affect our ability to significantly reduce your interest rates and payments.
Over the life of your car loan, this 7% interest rate drop equates to significant savings. If your initial car loan interest rate was 12% and you refinance at 5%, you’re saving $6,000 in interest over the life of a six-year loan. So while your interest rate reduction is a little less due to the increased rates, your savings will still make refinancing worthwhile. Spending $6,000 less over the life of your loan is a no-brainer.
You can use our car refinance calculator to get a clearer picture on the amount of money you may potentially save by refinancing.
Is Refinancing Your Car Loan Still the Right Move?
In general, you will still significantly benefit from refinancing your car loan if:
- Your credit score has improved since you took out your initial car loan
- You didn’t shop around for the best rate when you took your original car loan
- Your existing loan doesn’t penalize you for prepayment
- You’re struggling to pay your bills and could benefit from the additional cash associated with lower monthly car loan payments
- You still have at least two years remaining on the initial car loan term
Even with these higher interest rates, iLending has been helping our customers achieve the empowerment that comes with greater financial freedom. Read our savings stories to learn about the ways in which refinancing has helped many individuals just like you.
iLending Makes Car Loan Refinance Easy
Despite higher interest rates, refinancing your car loan is still likely to provide significant benefits. At iLending, our customers save $145 per month on average after refinancing. This injection of cash into your monthly budget can be used to pay down other debt, make improvements on your home, take a much-needed vacation, or countless other things that will enrich your life.
When you work with iLending, you’ll not only experience significant monthly savings, but you’ll enjoy an easy and hassle free refinancing process. Our exclusive You First Approach™ has been created to ensure you have a great experience.
As part of this unique approach, we’ll pair you with a loan consultant who will take the time to get to know you and understand your specific goals. Your loan consultant will then compare rates from our vast network of nationwide and local lenders so that you don’t have to spend hours shopping around for the best rate. Based on the goals you identify together, your loan consultant will review the best loan options with you and help you make the right decision.
In addition, you’ll experience unparalleled levels of personal care throughout the process. Your loan consultant is always available to answer any questions you may have. We’ll also help complete your paperwork for you and follow up after the refinance process to ensure you’re happy with your new loan.
Apply now to start the refinancing process.
What would you do with an extra $148* in your pocket?
