Turn on any news program, and you’ll likely hear economists discussing the possibility of a recession. And though the U.S. labor market remains strong, the New York Fed recession probability indicator suggests a 68.2% chance of a recession sometime in the next 12 months. This type of news can be stressful, causing anxiety and fear among American workers.
And we get it, a recession is not something we want to go through again. But by practicing responsible personal finance management, you can weather the storm of a recession and come out unscathed on the other side. One way to do that is by considering an automobile refinance.
Automobile Refinance and Personal Finance Management - The Two Can Go Hand in Hand
In times of economic uncertainty, such as a recession, taking proactive steps to manage your finances effectively is crucial. One area where you can find potential relief is through automobile refinance. As recessions impact interest rates, loan availability, and borrowers' financial situations, it's essential to understand how refinancing your car loan can play a significant role in navigating these challenging times. Let’s explore the steps you can take to determine if a car loan refinance is right for you.
Understanding a Recession’s Impact on Car Loans
Before we get into too much detail, let’s level-set on just what a recession is. A recession is a significant, widespread, and prolonged downturn in economic activity. The three primary characteristics are a falling GDP (gross domestic product), a rise in unemployment, and a decline in real incomes (how much money an individual or entity makes after adjusting for inflation). And we know what you’re thinking; that doesn’t sound good. And it isn’t.
But, the key to weathering a recession is financial preparedness. Equifax, one of the three primary credit bureaus in the U.S., suggests taking stock of your financial priorities, focusing on debt repayment, evaluating your career opportunities, getting ahead financially (socking some money away in an emergency fund), and staying on top of your finances.
Part of this process involves looking at your loans, how much you pay each month, and what you pay in interest. The higher your monthly car payment, the less money you have to manage your other debts and pay additional expenses.
But what happens to car loan interest rates during a recession? The answer is just what you might think—car loan interest rates typically decrease. This is because central banks and financial institutions take measures to stimulate the economy. They aim to encourage borrowing and spending by lowering interest rates, which can help stimulate economic growth.
Lower car loan interest rates mean borrowers can secure loans at more favorable terms, potentially resulting in lower monthly payments and overall savings.
Evaluating Current Car Loan Terms
Before considering car loan refinancing during a recession, evaluating your current car loan terms is essential. By assessing factors such as interest rates, monthly payments, and remaining balance, you can determine if refinancing could provide better financial opportunities, saving you money. Let's explore the aspects you should consider when assessing your car loan terms.
Factors to Consider for Refinancing
When assessing your current car loan terms, consider the following:
- Interest Rate—Take note of the interest rate you are currently paying on your car loan. Compare it to the prevailing interest rates during the recession. Lower interest rates may indicate an opportunity for refinancing.
- Monthly Payments—Evaluate your monthly payments and analyze how they fit within your budget. Assess if refinancing can lower your monthly payments, providing more financial flexibility.
- Remaining Balance—Determine the remaining balance on your car loan. Understanding how much you still owe can help you calculate potential savings through refinancing.
- Loan Term—Examine the remaining length of your loan term. If you have a long repayment period, refinancing to a shorter term may help you pay off your loan faster and save on interest.
- Penalties or Fees—Check if your current car loan has any prepayment penalties or fees for refinancing. Understanding these costs will help you evaluate the financial viability of refinancing.
- Credit Score—Knowing your credit score can be helpful if you are considering an automobile loan refinance. Your credit score falls somewhere between 300 and 850. A credit score of 700 or better is generally considered good. Though you can refinance your loan with bad credit, a good score can provide better interest rates for a loan refinance. And for reference, the average credit score in the U.S. tends to hover around 714.
- Loan-to-Value Ratio—This measure compares the loan amount to the appraised value of the financed vehicle. This information helps lenders assess the loan risk based on the borrower's equity stake.
Researching Refinancing Options
When exploring refinancing options, consider various lenders such as banks, credit unions, and online lenders. Each institution has its own advantages and disadvantages.
- Banks—Traditional banks often provide a sense of security and personalized service, but their loan terms and interest rates may need to be more competitive.
- Credit Unions—Credit unions are member-owned and can offer lower interest rates and flexible terms, although eligibility criteria may apply. If you are looking for a personal touch and a one-to-one relationship for your financing needs, a credit union can be a wise choice.
- Online Lenders—Online lenders, such as RateWorks, provide convenience and quick approval processes, but reviewing their reputation, fees, and interest rates is essential before deciding. When you find the right online lender, borrowers experience many benefits because they can get immediate gratification from a lowered rate and potentially lowered monthly payments (especially helpful during a recession).
Assessing Your Potential Savings and the Impact on Personal Finance Management
Everyone wants to save money here and there, and especially during a recession. Every dollar saved on your automobile loan can be deployed to help cover other debts or to get socked away into that emergency fund we discussed earlier. To that end, calculating the potential savings from refinancing your car loan can help you understand the impact on your personal finance management.
Let's explore some simple examples to illustrate how lower interest rates can affect your monthly payments and overall cost:
- Example 1—Suppose you have a car loan with a balance of $15,000 and an interest rate of 6% with 3 years remaining. Refinancing to a new loan with a lower interest rate of 4% could reduce your monthly payments by around $30, saving you $1,080 over the loan term. That $30 monthly can help pay for gas or make a slight dent in the grocery bill.
- Example 2—If you have a larger loan balance of $25,000 with a higher interest rate of 8% and 5 years remaining, refinancing to a new loan with a lower interest rate of 5% could lead to monthly payment savings of approximately $70, totaling $4,200 over the loan term. And $70 a month can pay for a full tank of gas, or more, especially with today’s high gas prices.
As you can see, even a slight reduction in interest rates can result in significant savings over time. By assessing your potential savings, you can make informed decisions to improve your personal finance management and allocate those savings toward other financial goals.
Navigating the Refinancing Process Before or During a Recession
Refinancing your car loan during a recession can be a smart move to improve your financial situation. And the process to refinance your car isn’t as complicated as you might think. Online lenders such as RateWorks have created a simplified process that spends less prep work and more time, saving you money.
Let's explore the simple and easy-to-follow steps involved:
- Gather your documentation—Prepare essential documents such as your current car loan statement, proof of income, identification, and credit score.
- Research and compare lenders—Explore different lenders, including banks, credit unions, and online lenders. Compare their interest rates, terms, and fees to find the best refinancing option.
- Submit your application—Fill out the refinancing application with the chosen lender. Provide accurate information about your current loan, vehicle, and personal details.
- Await approval and review terms—The lender will review your application, credit history, and documentation. Once approved, carefully review the terms and conditions of the new loan, including interest rate, loan duration, and any fees involved.
- Sign the loan agreement—If you're satisfied with the terms, sign the loan agreement and any necessary paperwork the lender provides.
- Pay off your existing loan—After approval, the new lender will pay off your existing loan. The best lenders will ensure a smooth transition and make verifying the loan payoff with your previous lender easy.
- Begin making payments—Start making payments according to the terms of your new loan. Set up automatic payments if available to avoid any missed payments.
- Monitor your progress—Keep track of your refinanced loan and review your progress periodically. Evaluate whether the new loan achieves the desired savings and aligns with your personal finance goals.
Remember, the timeline for the refinancing process can vary depending on the lender and individual circumstances. With RateWorks, the process can take four to seven business days while we go through the necessary steps to get your new loan.
Risks & Considerations for Refinancing Your Automobile
If you’re thinking about refinancing your loan to prepare for a recession, you still need to be aware of personal risks that can impact your personal finance management. Here are a few important points to keep in mind:
- Extended loan terms—While refinancing can lower your monthly payments, it also extends the overall duration of your loan. This means you could end up paying more in interest over time. Carefully evaluate whether the long-term savings outweigh the extended repayment period.
- Prepayment penalties—Some lenders impose prepayment penalties if you pay off your new loan earlier than the agreed-upon term. It is essential to understand if such penalties exist and factor them into your decision-making process. For this reason, we recommend looking for online lenders that do not charge fees related to the refinancing process. Those fees can add up and can actually cost you more than what you might save on a percentage point or two in interest.
- Impact on credit score—Applying for refinancing involves a credit check, which could temporarily lower your credit score. However, responsible management of your new loan can help improve your credit over time.
- Costs and fees—Refinancing may come with various costs, including application, origination, and title transfer fees. Take these expenses into account when assessing the overall savings of refinancing.
- Equity considerations—If your car has depreciated significantly or you owe more than its current value, it could affect your refinancing options. Lenders may have restrictions or offer less favorable terms in such situations.
- Personal circumstances—Consider your financial goals, plans, and potential life changes. Evaluate whether refinancing aligns with your overall financial strategy and if it supports your long-term objectives. However, if you can secure a loan with an online lender that doesn’t charge fees to originate the loan, this can still be worthwhile.
Seeking Professional Advice
Getting through a recession can be challenging. And it can be stressful trying to determine what decisions to make, where to cut back, and more. For this reason, many people turn to financial advisors or family members and friends for financial advice. Though only 35% of Americans work with a financial advisor, doing so is not necessarily bad. Financial advisors aren’t only for the wealthy.
Related to this, 71% of Gen Z (ages 18-25) and 72% of Millennials (ages 26-41) say there are financial topics they want advice on but need help figuring out how to get it. And only about 32% of Americans turn to registered financial advisors for financial advice, while 52% turn to family and 41% to digital sources. As you can see, if you have questions and want advice on handling your financial management during a recession, you aren’t alone.
The key here is to get ahead of the game by thinking through your financial situation now and not waiting until we are in the throes of a recession. Following the advice in this article can help you thoroughly research your options and decide if an automobile refinance is right for you.
Refinancing Your Automobile May Help You Get Ahead of a Recession
All in all, determining whether or not you should refinance your vehicle is a personal decision. Be sure to assess multiple lenders thoroughly, look for origination fees, and clearly understand how much you can save before signing any dotted lines. That said, refinancing your car is easier than you could have imagined. And with the right lender and no fees, you could be on your way to saving money in just one week’s time. Remember, every dollar counts.