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Take Control Over Your Monthly Finances: Understanding Car Loan Interest Rates

In most cities in America, having a car is a necessity, not a luxury. Using public transportation to get to work is not very reliable and using it for shopping if you’re anything but a thrifty single person is challenging. Not having a car can be tremendously expensive in many ways, so making your car payments is an essential part of your monthly budget, even if it’s a tight fit.

However, your monthly car payment is one of the areas in your budget that you can control. Car loan refinancing can help you take control of your monthly finances by lowering your monthly payment and potentially saving you significant money overall. Understanding your car loan interest rates can help you see the value of refinancing and how to maximize your benefit.

What Determines My Initial Interest Rate?

When you get your initial car loan, there are a few factors the lender uses to determine your interest rate:

Your credit score and income to debt ratio are two of the biggest determinants of your personal interest rate. If you have a bad credit score or a lot of debt, a lender sees you as a worse risk, and charges more interest to make sure they make money overall.

Used cars have higher interest rates because they are higher risk than new cars.

Your down payment is important not just because it reduces the overall amount of your car loan, but also because it reduces the ratio of loan amount to car value. This means that the lender is more likely to be able to get their money back if you default on the loan.

Interest rates for loans vary widely among lenders. Often, there’s little justification for this, but it means there is always value in shopping around. A different lender might give you a better loan seemingly at random.

Another factor that can seem random is the macroeconomic factors that cause daily fluctuations in interest rates. These can change by as much as 10% (for example, 5% to 5.5% or 4.5%) for the same loan on one day or another. This is why it’s often a good idea to get pre-approved, so you know your interest rate before buying a car.

How Much Can My Interest Rate Go Down?

lower your interest rate with car loan refinancingIf you’ve been keeping up on your payments, you can likely see some decrease in your interest rate when you refinance. For example, the average car loan interest rate dropped from 5.22% in the first quarter of 2020 to 4.09% in the third quarter of 2021. However, you are likely to see a more significant decrease if you:

How much you’ll see depends on your individual situation, but as an example, a recent average loan for a “subprime” credit score (501 to 600) was 11%, while the “near prime” (601 to 660) average rate was 6.6% and the “prime” (661 to 780) average rate was 3.5%. (Note: different lenders use different breaking points for credit score ranges.)

How Much Will Refinancing Save Me?

It can save you a lot. The exact amount will depend on your circumstances, but let’s use an average case to illustrate. In September 2021, the average car price was about $45,000 and the most common loan term was 72 months.

If you made a $5000 down payment and refinanced the rest of the car price at 11%, your monthly payment would be $761.36. If you made just the recommended payments for a year, then refinanced the remaining $35,000 at 6.6%, your payment would drop to $686.46, a savings of nearly $75.00 a month, and about $4500 over the term of the loan. If you could manage to refinance at 3.5%, your payment would drop by about $125 a month, and you’d save a total of nearly $7500.

You can learn more by playing around with our car refinance calculator or see what others have saved with our savings stories.

Are There Other Ways to Save on My Car Loan?

Reducing your interest rate isn’t the only way to save money on your car loan. You can also save significantly if you pay ahead on your car loan before refinancing. In the example above, if you paid enough more on your car payments to reduce the principal to $30,000 after a year (~$420 more a month) before refinancing at 3.5%, your new payment would drop to $545.75, a savings of about $215 a month, or nearly $13,000 over the term of the loan.

Find Out How Much You Can Save with iLending

If you are looking for a way to reduce some of your monthly expenses, refinancing your car loan can put more money into your pocket every month. With rent and groceries always going up, it’s nice to have something in your budget that you can actually reduce.

You can easily start the refinancing process in just a few minutes without a check on your credit score by clicking here. Then you can talk to a personal loan consultant who will help you understand the costs of refinancing so you can make an informed decision.

At iLending, we make car loan refinancing easy. Request a quote today.

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