Sarah T.
If you have followed the inflation rates over recent years, you know they’re up considerably since where we were sitting before the COVID-19 pandemic. In 2020, right before the shutdowns started, the inflation rate was 1.4%. Between 2021 and 2022, we reached a high of 7%; finally, in 2023 and 2024, we’re around 3.5%.
And though there have been rumors that the inflation rate is cooling and may continue to go down, there are concerns that auto interest rates won’t go down with it. We understand that you may have just read that last sentence, realizing you didn’t know that the inflation rate directly impacted auto refinance rates. But the ugly truth is—it sure does.
The Relationship Between Inflation and Auto Refinance Rates—The Basics
The interplay between federal interest rates and individual loan terms, including auto refinancing, can be complicated. But, we’ll try to clear it up. Federal interest rates, often set by the Federal Reserve (often referred to as "the Fed"), serve as a baseline influencing economic borrowing costs. These rates determine the cost at which banks can borrow from each other overnight, but they also ripple through to the rates consumers pay on everything from mortgages to auto loans.
When the Fed adjusts its rates, it's often in response to inflationary pressures. A higher inflation rate generally leads to higher interest rates as the Fed aims to temper spending and borrowing by making it more expensive. On the other hand, lower inflation usually leads to lower interest rates, encouraging more spending and borrowing by making it cheaper.
In 2024, with the inflation rate peaking at 3.5% in March from 3.2% in February, there's a clear indicator of upward pressure on rates. This adjustment is a strategy by the Fed to stabilize the economy and curb inflation without tipping it into recession.
Auto refinancing is particularly sensitive to these changes. Given the significant loan amounts associated with buying vehicles—the average cost of a new car is $47,000—even small fluctuations in interest rates can translate to serious differences in monthly payments. Plus, auto loan rates are somewhat more flexible compared to other types, such as fixed-rate mortgages, because they often come with shorter terms and different risk assessments.
Your Auto Refinance Rate Also Depends on Your Credit Score
While federal rates set the stage, individual credit scores play a big role in determining the exact rates that lenders offer to borrowers. For example, in March 2024, someone with a credit score of 700-749 might see auto refinance rates around 8.98%, while another person with a score between 600-699 might face rates as high as 10.09%.
Therefore, while the Fed's rates create a benchmark, a borrower's final rate is also a product of their financial health, as reflected in their credit score.
Should I Apply for Auto Refinancing in 2024 or Wait?
This all begs the question—when is the best time to refinance a car? And the answer may surprise you as the best timing might not have anything to do with the current inflation rate at all. Deciding to refinance your auto loan is all about your current financial situation. Ask yourself these questions?
- What is your current auto interest rate?
- Are you comfortable with your current auto loan payment or would you prefer it to be lower?
- Are you looking to pay off your loan quickly to avoid paying interest?
- Are you looking to extend your loan because a lower payment is your priority?
- What is the opportunity cost of not refinancing your auto loan?
The fact is that fluctuations and the recent volatility in our inflation rate doesn’t mean that you shouldn’t refinance your car. Ultimately, we cannot control what the Fed will do as individuals. Even by paying attention to the trends, it isn’t always an indicator of what is coming just around the corner—something we all learned when the pandemic surprised us all.
Deciding to refinance is a personal decision. Here is the way we see it. If your current interest rate is higher than the U.S. average—7.2% for new cars and 11.9% for used cars—it can’t hurt to see what rate you might be eligible for. And, if your current payment is uncomfortably high each month and puts you at risk of not having funds to meet other financial commitments, refinancing to spread out the rest of your loan, taking the step to apply for auto refinancing might be the best decision.
Get a Free Quote from RateWorks
If you want to know how you can save money by refinancing your auto loan, the next thing to do is get a free quote. Here is how to know if you are ready to refinance:
- Your car has under 140,000 miles
- You have made at least three car payments on your loan
- Your vehicle is less than ten years old
Get started today with a free quote. See how much you could be saving tomorrow.
