We all know that any fed funds rate hike will affect interest rates on most consumer loan products, car loans included. If you are financing your car, you will likely see slightly higher rates. Nevertheless, auto loan rates remain low and if your existing car loan rate is far from ideal, a refinance may be in order.
Car Loan Rates Could Rise Slightly
Last Wednesday, the Federal Reserve raised to a quarter percentage point its federal funds rate. The impact of this rate hike is felt the most by loans with short-term rates, trickling down to car loans with medium-term fixed rates and to a lesser extent those with longer-term rates.
It’s because car loan lenders price their loans based on the prime rate, which goes up or down with the fund rate. In response to the rate hike, banks will increase the prime rate.
You can thus expect to see slightly higher car loan rates when you shop around this time. With any increase in rate is an increase in monthly payments as well.
“Each quarter-point difference on a $25,000 car loan is just $3 a month. Or after four rate hikes, that goes up to $12 a month,” said Greg McBride of Bankrate.com. He pointed out that competition to which car loans are more sensitive to could slow any such rate increases.
Higher Existing Rates, What to Do?
The phenomenon of higher car loan rates is not exclusive to buyers. Those with existing car loans also worry about higher rates when they first took out their loans. Refinancing is about lowering your current car loan rate to eliminate the higher existing one.
Do a car loan refinance if:
- Your credit has improved since you took out the original car loan. A better credit score equals to a better car loan rate.
- Rates have dropped since the closing date of your car loan. A lower rate than your last reduces your monthly payments, which will make the loan more affordable to repay.
- You plan to shorten your loan term. This will help you save in total interest paid throughout the life of the loan and build equity faster should you refinance or sell your car.
Nevertheless, a refinance may not be an option available to you if:
- You’re upside down on your car loan. Also known as negative equity position, this is when you owe more on your loan than what your car is valued. Common reasons for an upside down loan include a long loan term which slows down the buildup of equity and the age and condition of the car.
- Your car payment history is not satisfactory. You may have made late payments on your car loan, which casts doubts on your ability to continue repaying your loan.
You can combat rising rates; do your homework and shop around for the best rates in town.
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