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.
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.