What would you do with an extra $1,000/year? You could pay off some bills, create a buffer for your emergency fund, or take an epic road trip (can you guess which option we'd choose?) No matter what you'd do with the extra cash, it can certainly be a welcomed addition to your bank account. Nearly $1,000 was the average amount car owners saved when they refinanced their auto loan last year according to a study by RateGenius. The savings were at the highest level in years as interest rates were at their lowest. See if the favorable refinancing environment will stick around for 2021 and whether you should refinance your auto loan this year.
Refinancing Savings Grow in 2020
The RateGenius auto financing report conducted an analysis of over half a million auto loan refinance applications from 2019-2020 to examine variables like interest rates, savings, credit scores, and debt-to-income ratios by vehicle type and geographical region. The results found more Americans refinanced their auto loan last year than in the last 4 years. There was also a dramatic drop in interest rates from the original loan to the refinanced loan which correlates with the substantial annual savings.
The rush to refinance in 2020 paid off for many car owners. RateGenius found that Americans saved an average of $989.72 a year on refinancing their car in 2020, the largest amount since 2016. Many applicants saw even higher savings, with 42% of successful refinancing applications saving $1,000 or more.
Lower interest rates are largely to thank for the increased savings. With an average interest rate of 10.5% on their existing loans, the average interest on the refinanced loan was 5% which is the most dramatic interest rate reduction in eight years.
The COVID-19 Effect
COVID-19 and its economic effects played a role in the auto refinancing trends of 2020. The report found that 16% more Americans applied to refinance their auto loan in 2020 vs. 2019 and 17% more were able to successfully refinance. While the first two months of the year saw fewer refinance applications year-over-year, the uptick began in March, coinciding with the pandemic's arrival. By September, auto loan applications were 36% above 2019.
Not only did more car owners refinance last year, but they also did so faster than ever before. On average, Americans who applied to refinance their auto loans did so only 14.5 months into their existing loan which is the shortest time on record. The increase in auto refinance applications during the pandemic can be attributed to fact that the Federal Reserve’s interest rate (which influences auto rates), was below 0.1% throughout most of the year which is the lowest it’s been in nearly a decade.
Auto refinance trends were also found among vehicle segments. Light-duty pickups such as the Ram 1500, Chevrolet Silverado 1500, and Ford F-150 were the most refinanced vehicles of the year, accounting for nearly 10% of all refinanced loans in 2020. Pickup truck owners also reaped the highest savings among major vehicle classes with an average of $1,138 a year. Refinanced loans on sedans and hatchbacks had the greatest interest rate reductions (down 6.6% and 6.3%, respectively) from the original loan.
In 2020, the average credit score for an auto loan refinance applicant was 657 which is down three points compared to 2019. Meanwhile, the average credit score for a successful refinancing application stood at 721 which is three points above 2019. Overall, credit scores remained stable during 2020 due to a decrease in credit card spending, loan repayment breaks, and the stimulus checks that prevented defaults. The credit score gap between a successful applicant (721) and all applicants (657) was 64 points, which is the largest it’s been in the past five years.
2021 Auto Refinance Outlook
The outlook for auto refinance continues to be favorable for 2021. Interest rates are predicted to stay low, and the economy is expected to grow by 4% as unemployment is predicted to shrink to 5.5%. According to RateGenius Vice President of Lender Management Julie Shinn, “Rate changes typically follow market trends. For now, there is no indication the Federal Reserve intends to adjust rates in the near future. Our lenders want to remain competitive. As long as the Fed rate remains low, we do not anticipate any significant changes in rates on our network.”
Based on the savings reported in 2020 and the positive outlook for this year, refinancing your auto loan can be a good decision. Car owners should consider refinancing an auto loan if current interest rates are better than when the loan was originated, if their credit score has improved, or if a financial setback requires lower monthly payments. So what's the best way to refinance? According to a Transunion study, even though banks issue most auto loans, it's credit unions that dominate refinancing, accounting for 69% of all auto refinance loans in the first quarter of 2020. We suggest shopping around for refinancing from multiple lenders to find the best interest rate, monthly payment, and loan term that fit your budget.