What Impacts Car Loan Refinance Rates?

Have you been paying attention to car loan interest rates? If so, you’re likely not alone. With interest rates where they’ve been in the recent years, we’re all paying attention. But do you really understand what causes car loan interest rates, specifically auto loan refinancing rates, to rise and fall? 

In this article, we’ll lay it all on the table for you so you know why the interest rates are where they are. With this information, you’ll be better able to determine the best time to refinance your current auto loan.

What to Know About Car Loan Refinance Rates

Before we get into all the things that influence your car loan refinancing rate, let’s get on the same page about the difference between general interest rates and auto loan interest rates. Car loan refinance rates are the interest rates you’ll be offered when replacing your current loan with a new one. These rates may differ from your original loan rate based on changes in the market, your credit score, and other factors. 

Refinance rates are typically lower if your financial situation has improved since taking out the original loan. It's also important to shop around and compare offers from multiple lenders to find the most favorable rate, as lenders can offer different terms based on their own criteria and policies.

Key Factors that Determine Your Auto Loan Refinance Rate

Here is what is important for borrowers to realize—yes, external market factors will influence auto loan refinance rates. For example, those things include:

• Economic Conditions: When the economy is strong and growing, interest rates tend to rise. During slow economic periods, rates are often lowered to encourage borrowing.
• Inflation: Higher inflation usually leads to higher interest rates because lenders need to account for the reduced value of money over time.
• Federal Reserve Policies: The Federal Reserve sets benchmark rates that influence all types of loans, including auto loans. When they raise or lower rates, it affects the rates you may be offered when refinancing.
• Supply and Demand: When more people are borrowing, rates can increase. When demand is lower, rates tend to drop.

And while those things impact the range of interest rates that might be available to you, the actual interest rate you will get approved for is heavily influenced by your financial behaviors and your particular situation. Read on to understand more.

Credit Score 

Your credit score plays a significant role in your interest rate. The higher your credit score, the more likely you are to be approved for a lower interest rate and more favorable loan terms. Lower scores lessen your likelihood for approval and typically come with higher interest rates, and, sometimes, incremental fees. 

The thing to understand here is that your credit score gives lenders a glimpse into your financial behavior. A higher score typically corresponds with someone who has a history of making responsible financial decisions.

Vehicle Age and Mileage 

While you can’t necessarily control how old your vehicle is or the number of miles on it, it will impact your interest rate. Newer cars usually qualify for better interest rates because they have a higher resale value and are considered less risky by lenders. 

On the other hand, high mileage or older vehicle models may lead to higher rates since they are more likely to experience wear and depreciation. Lenders view these vehicles as a greater risk, which can result in less favorable loan terms. And, if your car is older than ten years and has more than 100,000 miles, the chances are less likely you will be able to refinance your car loan.

Loan-to-Value (LTV) Ratio

Next up is your loan-to-value (LTV) ratio. Basically, this is a calculation of how much you owe on your loan compared to the value of the vehicle. A higher LTV signals potential risk to lenders as you don’t have as much equity in the vehicle (if any equity at all). The result is typically higher interest rates. 

Know that most lenders are comfortable with an LTV of 125%. This means your car is worth at least 25% more than what you owe on your existing loan.

Employment and Income Stability

Any lender is going to want some evidence that you are gainfully employed and have a stable income. This offers reassurance that you will have the funds to meet your monthly payment obligations, and eventually, pay off your loan in its entirety. Lenders often assess risk How based on income and job history. So, the more stable your history, the better.

Loan Term Length 

Short-term loans generally come with lower interest rates because lenders take on less risk over a shorter period. However, the trade-off is higher monthly payments. Long-term loans, on the other hand, spread payments over a longer time, resulting in lower monthly costs but usually higher interest rates. This means you’ll end up paying more in interest over the life of the loan with a longer term.

Lender Policies and Requirements

Lastly, lenders have their own policies and requirements about who they’ll approve, their loan amounts, interest rates, etc. Each lender sets their own criteria for approving loans, which can impact the interest rates they offer. Factors like credit score requirements, loan-to-value ratios, and minimum income levels vary between lenders. 

This is why shopping around is beneficial—by comparing multiple offers, you can find the lender with terms and rates that best suit your financial situation, potentially saving you money over the life of the loan.

RateWorks Offers Competitive Interest Rates for Auto Loan Refinancing

As we shared above, doing your homework and researching interest rate ranges across lenders is a necessary step when considering an auto loan refinance. But we have some good news for you—if you are wondering where to find the best car loan refinance rates, you’ve come to the right place.

Check out our loan calculator to see how much money you can save, and then request a quote. We’re confident you’ll be glad you did.