Preparing for the Coronavirus Economic Meltdown: Why You May Need to Refinance Your Car Loan Now

We’re treated to a steady barrage of ads hawking ever lower mortgage rates, or the latest 0% introductory APR offers on credit cards. But lost in the mix are auto loan refinances. That’s unfortunate, because it appears we’re on the cusp of the coronavirus economic meltdown. That being the case, you may need to refinance your car loan now.

Preparing for the Coronavirus Economic Meltdown: Why You May Need to Refinance Your Car Loan Now
Preparing for the Coronavirus Economic Meltdown: Why You May Need to Refinance Your Car Loan Now

Right now, a disproportionate number of automobile owners are sitting in loans with higher interest rates than they need to have. In large part, this is because the vast majority of auto financing is handled through car dealerships. In fact, according to the National Automobile Dealers Association (NADA), 85% of auto loans are financed through dealerships.

That may be a convenient arrangement, sparing you the need to get financing on your own. But it has real potential to lead to negative outcomes.

First, when you rely on the dealership to get you your financing – as well as your car – it gives all the bargaining power with the dealer. But second, and most important, dealerships are notorious for steering buyers into high interest loans. The reason is simple: dealerships make more money putting you in a high interest loan than they do in a prime rate loan.

Tales from the Automotive Front Lines

Some years ago, a friend of mine worked in a popular, high volume car dealership. He worked there for six years, which is a long time in one place in the car business. The first three years were in sales and the other three as a finance manager. As you might expect, he had plenty of stories to tell.

The most shocking: dealerships often make more money on the financing than they do on the sale of the vehicle itself. That’s because high-rate financing companies pay them generous incentives to steer you in their direction

He confirmed the practice of dealerships steering people into higher interest rate loans. That wasn’t the first time I heard that allegation. But given his deep experience at a major dealership, it took on added weight.

Car buyers, it seems, set themselves up for just such an arrangement. Some have bad credit, some have less than perfect credit. Some don’t bother to check their credit scores at all. Others, maybe most, just don’t feel like going through the loan application process. But if this describes you, you’re setting yourself up to pay more for a car loan than you should.

As my friend put it, “people don’t buy cars, they buy monthly payments”. Put another way, once a buyer expresses interest in a certain vehicle, it’s the dealership’s job to create a payment that will fit within the buyer’s budget.

How Dealerships Get You into High Interest Rate Loans – Often Without Your Knowledge

Dealerships – and the financing companies they work with – have all kinds of tricks to mask high interest rate loans with seemingly low monthly payments. One of the best ways is using extended loan terms. Rather than the typical 36-, 48-, or 60-month car loan, instead borrowers are steered into 72- and even 84-month terms. The payments are more reasonable only because there are a lot more of them.

But where a car buyer might be able to get a loan at 4%, 6%, or 8%, instead they pay 15%, 18%, 20% or more.

In most cases, they’re completely unaware they’re being hoodwinked. They believe the dealer and the dealer’s finance manager when he or she tells them their credit score came back lower than expected. They believe when they’re told the only way to get financing is with a higher interest rate loan.

The Better Strategy for Getting a Car Loan

Rule #1 for auto loans: get your own financing before you even talk to a dealer. That will not only guarantee you the lowest rate possible, but it will also give you a much stronger negotiating position on the car itself.

Using services like Credit Karma and Credit Sesame you should be able to get access to your credit scores on regular basis and free of charge. But they’re also available through many banks and credit unions. All you need is a checking or savings account, or a credit card, and you’re likely have access to your free credit score on a monthly basis.

Most banks and credit unions will require you to have a minimum credit score of 650 to get prime financing, though higher scores get even lower rates. If your score is isn’t that high, you’ll need to raise it. Pay off any past due balances you owe, and reduce your credit card balances as much as possible. Either will help raise your score.

If your score is at least 650, your first stop before going to the dealer should be to your regular bank or credit union. You may also want to shop around among banks and credit unions in your area.

If you can get a loan from traditional sources, the only reason to accept dealer financing is if they can get you a lower rate with no “gotcha provisions”.

Just Because You’re in a High-Interest Car Loan Doesn’t Mean You Have to Stay There

If you have the misfortune to find yourself in a high interest rate car loan for any of the above reasons, or because you had bad credit at the time you bought your current car, you owe it to yourself to refinance into a lower rate loan.

Five years ago, my son bought his first car. He had very little credit, which gave him a low credit score. But his previous car crapped out, and needed to be replaced as soon as possible. He chose a car and was offered an even lousier financing arrangement. But because he needed the car, he took the deal they offered.

In the end, it worked to his advantage – even though he paid more for the loan than he should have. Less than two years into the loan term, his credit score improved enough that he was able to get a prime rate refinance on his loan through our credit union. That not only dropped the rate and monthly payment, but also chopped about a year and a half off the loan term.

If that situation describes you, or the dealership steered you into a high rate loan, check your credit score and see if you can refinance your high rate loan.

The Coronavirus Economic Meltdown is Adding Urgency to Refinancing Car Loans

No one knows how deep or long the coronavirus recession is going to be. But we were overdue for an economic downturn well before the virus hit. The pandemic has served as a trigger, and has undoubtedly made the outcome worse than it would’ve been in a normal recession.

Recessions ultimately result in a loss of jobs, and frequently tighter lending standards. Now may be the best time to refinance your car loan in preparation for leaner times to come.

That’s the exact reason refinancing a high interest rate car loan should be a priority. If you have a job now, and your credit score makes the cut, get your new loan in place now. A lot of people lose their cars – and have their credit annihilated – during recessions. Predatory car loans are a major reason why.

Where to Get a Lower Rate Car Loan

The most obvious place to begin your search is with the bank or credit union you regularly deal with. You may also want to expand the search to include other banks and credit unions. Many will welcome your business even if you don’t already have an established banking arrangement with them.

Alternatively – and to take your loan search even farther – you should also investigate auto loan marketplaces.

For example, WithClutch is a fully digital platform that lets car owners refinance their loans without needing to go to banks and credit unions. You may be able to get a lower rate loan in a matter of minutes. LendingTree is perhaps the consummate online lending marketplace, offering every type of consumer loan available. That includes auto loans. Either platform will give you an opportunity to get loan quotes from multiple lenders, enabling you to choose the one that will work best for you.

Final Thoughts on Why You May Need to Refinance Your Car Loan Now

The coronavirus pandemic has caused what is probably the fastest recession in history. The virus itself went from a back-page news story to a global pandemic in a matter of weeks. The economic damage is still being assessed.

Unfortunately, an economic downturn that hits that quickly leaves little time for advanced preparation. But all the more, you should do whatever you can now to get yourself in better financial shape for the months and years ahead.

Refinance your car loan into a lower rate, pay down and pay off credit card debt, and save as much money as you can. So much of how well anyone survives a recession has to do with their overall financial situation. The better yours is, the better you’ll weather the storm of uncertainties ahead.

( Photo by verchmarco )

6 Responses to Preparing for the Coronavirus Economic Meltdown: Why You May Need to Refinance Your Car Loan Now

  1. Getting a lower rate on your loan is a good idea and should be pursued as you wrote above. However, the mindset of people needs to change when it comes to owning a car.

    I’m not sure why in America people feel like they need to buy new cars or any car they need to finance. I have in 35 years, never bought a car over 10,000 dollars. I have been stranded once that I can remember in all that time. That is the biggest myth I hear over and over about buying a new car is ” I need something reliable”

    Cash is king also when it comes to this. I bought a used Volvo 7 years ago. They had it listed for 10,200. I walked into that place with 8000 cash and they took it. I offered him 8000 before he saw the cash and he laughed at me. The minute I whipped out that cash he took it. Right on the spot. I drove away 2 hours later.
    I had that car up until this past Feb. Drove it 80000 miles without being stranded once.

    The two cars I own now. I paid 6000 and 5000 and they both run like a dream. Yes, you should plan on spending a 1000 a year on them but it is a hell of a lot cheaper than loans and paying interest.

    This is more the mentality we need to adapt to. Especially during a downturn. I believe we are headed for the biggest crash in history.
    I have said it on here many times, our mentality and relationship to money have to change. We have been brainwashed as a nation into financial illiteracy and foolishness.

    Refinancing is a short term play. It is ok and should be done but the long term play is changing the way we live and think about these things. The car thing is a pet peeve of mine. Especially when the value plummets the minute we drive away in that car. You might as well just throw a few grand out into the street. It’s the same thing.

  2. Hi Tim – I’m with you completely. The article is targeted at people who already have a car loan, and so many have been herded into high interest loans. My thinking is now is the time to get out of those because we don’t know what things will be like in a year or even six months. Interest rates are super low right now, so this is the time – or better put – the window to refinance if you can.

    For myself, I just bought a 2006 Chevy Impala with 104,500 miles for $1500. Few people would do that, but I work from home and only need a second car to make 2-3 local trips per week. It makes no sense for me to buy something higher priced or worse, to take financing. The car is from a friend of the family and while I was planning on getting a second car anyway, this one fell in my lap. I drove it for half an hour to gauge the engine and it runs fine. I plan to keep it for a couple of years, and yes, I’m ready to sink $1,000 or more per year into repairs. Even if it’s double that, that’s still half the annual cost of monthly payments.

    Oh, and in an unexpected bonus that seems to follow the frugal, our monthly car insurance bill went DOWN with the new car due to the multi-car discount (now four cars with our adult kids cars included). That’s even though the Impala has collision, comprehensive, towing and rental replacement. Some would say you don’t need those coverages on such an old car, but since they cost virtually nothing I took them. Even if they only give me $1,000 if the car is totaled, it’ll still be like found money.

    It pays to think outside the box!(!!!)

    One more point – you said “That is the biggest myth I hear over and over about buying a new car is ” I need something reliable”’; you’re absolutely correct about that. But what I learned in the mortgage business (from people buying houses) is many do a sales job on themselves to justify spending more than they should. I’ve heard all kinds of justifications with buying houses, and with cars too. The brain can stretch in ridiculous directions when people are looking to justify a major purchase. I’d rather keep the major purchases minor so I’ll have more money for savings, giving, and the things I really want or like to do. That feels more freedom than being shackled by a high cost of living and a bunch of debts.

  3. If things continue as they are going now, car loans will ne the least of anyones worries. I think I would worry more about food and shelter. There are many jobs and industries that are not coming back. If you default on loans for cars, education or even houses you’ll be in so big of a group they will have to just let them go.

  4. Hi Ric – That’s certainly a possibility, but I wouldn’t bank on it. In the 2008 meltdown the mortgage lenders held homeowners (term used lightly) to paying their loans or be dispossessed. And if they were, they got 1099s for the unpaid debt (I saw a lot of this working in a CPA firm in the aftermath). And so far no one’s student loans have been forgiven or even written down.

    It is possible a debt moratorium will be declared, but only under extreme circumstances. The government protects lenders because too many loans defaulting or being forgiven hurts banks and pensions, and that will destroy the “all is well at the core” narrative.

    On in individual level, now is a good time to either refinance any debts you have into lower rates and payments, or better, to pay them off entirely. Unfortunately, this crisis is likely to last longer than our financial resources will, so it’s good to pre-position ourselves into better, more survivable financial positions. In other words, lighten the load, and be prepared for anything.

  5. I agree with Ric Pau there’s much more to food and shelter. The thought of getting a car loan is going to cost you more pressure. However, there is a reasonable way to solve this issue.

  6. Hi Steve – I’m not sure what you mean by a reasonable way to solve this issue (please elaborate, since that’s what this article is really getting at). I certainly agree with Ric on the importance of food and shelter. But in the modern world, cars have great economic importance. At a minimum, they’re needed to get to and from work. But they may also be needed to find ways to earn extra money, like gig work.

    I agree that in the historical sense food has always been more important. But unless you live on a farm, that will be much harder to deal with, and probably a much more fluid challenge. But in the 21st Century, cars are an absolute necessity for most people. I can’t imagine going through an economic crisis without one.

    Shelter – I don’t think that’s the problem it’s often made out to be. Yes, housing prices (owning or renting) has become prohibitive in the past 20 years. But most people have more shelter options than they realize. At a minimum, you can move in with family. This is something my wife and I have already discussed with our adult kids, that we may need to share a space if conditions get bad enough (and they agree). I also think that if things get bad enough, shelter costs are going to collapse if enough household consolidate, and people look for alternative shelter. We have a thriving tent community just outside downtown and it’s just one example of how people cope with an economic crisis.

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