Are you somewhere in the back of your mind thinking you should maybe refinance your auto loan? If so, you should probably get your skates on, because there's a real possibility interest rates will go up again soon. And that would likely reduce your savings, and could even undermine the economics of refinancing at all.
Longer Auto Loans and More Refinancings
In July 2016, credit bureau TransUnion published a report that revealed some interesting facts about consumers' vehicle financing habits. Apparently, we're generally keen to keep our monthly payments within bounds, so we're increasing the term (length) of our auto loans so we can afford as good or better cars and trucks without hammering our household budgets.
Back in 2010, the average auto loan lasted 62 months. But by 2015 that had grown to 67 months. Looked at another way, in the third quarter of 2015 around 70 percent of all those loans had terms of 60 months or more, compared with half back in 2010.
Why Auto Refinancing Is So Popular
TransUnion senior vice president Jason Laky commented in a statement:
In recent years, longer-term auto loans have grown in popularity as consumers aim to keep monthly payments at a certain threshold. However, our study found that consumers are keeping their loans for a shorter period – a likely result of the low interest environment that has allowed more borrowers to refinance their loans.
In other words, people may be starting out with longer loans to keep down monthly outgoings, but then they're cutting those payments again by refinancing. Often that's a very smart move, especially if it's your credit score improving that's earned you a lower rate, or if you started out with a lousy deal. (Please say you didn't take your dealer's finance package without shopping around for an auto loan first!)
However, refinancing to lower monthly payments can often be expensive in the long run if it's done in the wrong way. As LendingTree explores in When Refinancing Your Auto Loan Doesn't Save You Money, extending the length of your loan may reduce each of your payments, but it increases their number, and that's likely to see you ultimately pay more for the same vehicle. Of course, you may be at a point in your life when your monthly outgoings have to be your principal focus, and you've no choice but to pay more in the end in order to keep up now. Fair enough. But one way to do that is looking increasingly iffy: refinancing from a fixed rate to a variable one.
Interest Rates Set to Rise?
This is being written in the first half of September 2016, and by the time you read it things may already have moved on. But right now multiple top Federal Reserve officials are talking up the likelihood of a general interest rate hike in 2017. That could happen as soon as September 20-21, which is when the next meeting of the Federal Open Market Committee (FOMC, the Fed body that determines that organization's rates – and many, many others) is scheduled. Or it could be at its November or December meetings. Of course, if events intervene (perhaps unemployment spikes, unlikely as that currently seems), it may not happen at all. But at the time of writing a whole lot of smart money in global markets is being bet on a Fed rate hike this year.
If that smart money is proved right, the monthly payments on all variable-rate loans (most credit cards and personal loans as well as auto loans) are virtually certain to rise, and anyone who's just refinanced from fixed to variable is going to feel pretty sick. True, the first increase is likely to be small, but the Fed would like to follow up with more of them in 2017 and beyond.
And, if you want to refinance your auto loan at all, any hike in general interest rates is almost bound to affect you. Even if you stick with a fixed-rate loan, you'll pay more unless you get in before the first hike. So you may want to stop thinking about refinancing and act now. Use the LendingTree auto refinance calculator to model your options, including with a higher rate than you'd currently have to pay. And learn more generally at What to Consider When Refinancing Your Auto Loan.