Auto Loan Refinancing Is a Thriving Business That Most Buyers Don't Know About
Refinancing is common, just not with car loans
If you are responsible for paying off a substantial loan, like a mortgage or a student loan, you may be familiar with refinancing. If you paid attention to commercials within the past few years, you'd probably be aware that financial service firms, credit unions, and banks like SoFi offer these services as a potential solution to help people relieve their financial burden by taking advantage of lower interest rates or a borrower's better credit score.
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While many take advantage of these programs to lower their monthly payments on these fairly traditional financial products, refinancing a car loan has not been a very popular concept, but that is starting to change.
Source: Getty Images
Auto lenders say that refinancing is gaining steam
According to a new report by Automotive News, two major credit unions in the auto lending business reported a noticeable increase in consumer interest in auto loan refinancing. During a panel discussion at Auto Finance Summit East, Michael Williams, the senior vice president of consumer lending at American First Credit Union, described it as a 'seismic shift.'
According to him, about 65% of its auto lending activity usually went towards financing new vehicle purchases, while the other 35% went to refinancing existing loans. However, during the past 6–9 months, the ratio moved closer to 50/50, and in the last two months, it tipped to 55% refinancing.
The shift is also showing at PenFed Credit Union. Its vice president and head of auto lending strategy, Chris Kleczynski, noted during the same panel that over the past few months, refinancing made up 20% to 25% of PenFed's applications, up from about 15% prior, which it says comes from customers who have improved credit scores or positive equity in their vehicles and want to secure lower monthly payments.
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Additionally, the largest bank in the United States, Chase, announced in June that it's reentering the auto refinance market, aiming to serve the millions of existing Chase customers who currently have car loans through other lenders. 'There's just some natural lift and demand out there,' Kleczynski said.
Source: Getty Images
Borrowers can experience substantial savings through refinancing. According to iLending, a company that specializes in auto refinancing, the average consumer saves over $140 per month by refinancing. Additionally, Caribou, another refinancing company, noted in a report in June that customers with good credit and steady incomes saved between $126 and $147 per month, depending on their age group.
Kleczynski pointed out that the profile of people looking to refinance is also shifting. Some are focused on extending loan terms to lower their monthly payments, while others simply want to score a better interest rate. Still, he said many consumers don't even consider refinancing their vehicle. 'People get that you can refinance a mortgage,' he said. 'But when it comes to car loans, there's a lot less awareness. It's just not on people's radar.'
Buyers are taking out longer, scarier loans than ever before
The new insight into refinancing comes as buyers make significant financial sacrifices to get themselves into that new set of wheels. According to new data released by car-buying authority Edmunds, Americans are taking out longer, higher-interest auto loans to pay for new cars that are as expensive as ever. Per their data, 22.4% of new-vehicle loans are for terms over the course of 84 months (7 years), while 19.3% of these buyers had monthly payments that exceeded $1,000.
'It's clear that buyers are pulling the few levers they can control to manage affordability, whether that's by taking on longer loans, financing more, or putting less money down — even if some of those decisions increase their total costs,' Drury said. 'Consumers are continuously stretching to afford new vehicles in this market, and while tariffs haven't directly driven these Q2 numbers, they're certainly not going to make things any easier for shoppers moving forward.'
Final thoughts
Most times, refinancing often involves extending the term of how long you will be subject to making payments, and upon writing this, I immediately thought about a quote from Edmunds' consumer insights analyst Joseph Yoon, who warned that an extended loan term could have additional consequences down the line, as car ownership perils like upkeep and depreciation, kick in.
'While extended loan terms may make a monthly payment more palatable, consumers need to keep in mind the risks associated with a loan extended that far into the future, including increased costs for upkeep down the line and the risk of being underwater on the loan if the car is traded in before it's paid off,' Yoon said.
I also agree with Yoon's suggestion that if payments on a normal 60 to 72-month loan aren't possible, leasing can be a better option, as it could offer a lower monthly payment than a loan. Though the idea of getting a new car every 24 to 26 months sounds like a good idea, it should be noted that credit, credit, and credit determines whether you're a 'qualified lessee' that they talk about in the fine print of the special $199 or $249/month lease during the [Insert American Holiday here] sales event.
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