Refinancing your car during a recession
You may have heard rumors or fears of a recession. The US was rocked by the 2008 financial crisis that heralded one of the worst recessions in the nation’s history. Can we expect that again?
The answers are not so clear. The Fed is raising interest rates in an attempt to curb inflation and cool down demand for high-ticket items, but that in itself could create a recession. On the other hand, workers are still keeping their jobs, and we’re not seeing the kinds of pull-backs from companies and industries that we usually look for as indicators of a recession.
So where does that leave you? If you have a car loan that’s weighing on you, you might be considering refinancing your vehicle to take advantage of better rates and loan terms. Is that a good idea in the current economic climate?
How we got here
The global economy is still being affected by the reverberations of the Covid-19 pandemic. In the beginning of the pandemic, the US economy lost roughly 23 million jobs, creating an unemployment rate of 14%. Since then, the economy has rebounded remarkably, with a 2023 unemployment rate of just 3.6%, and a job gain in January of 2023 alone of 516 thousand jobs. Wages for blue collar workers have risen, too, but inflation is making that wage increase less powerful than it would have been.
Supply chains were rocked by global emergency, so now, companies are more and more looking to create more sustainable and resilient supply chains. Companies are re-training workers to digitize and automatize their systems so that human error plays less of a role. Instead of linear supply chains, companies are looking to create networks so that they can source materials and pieces from a variety of outlets.
How does the economy affect car prices?
The effects of the 2020 (and 2021 and 2022–) Covid-19 pandemic have continued to unfold. Before the pandemic, the average car cost was 38.9k. In November 2022 the average car cost $48,681. That 10k price jump comes from prices across the board: cost effective cars and luxury vehicles. That’s because of inflation, generally, but more specifically it’s because of supply chain shortages during the pandemic.
As soon as pandemic lock downs started, factories and warehouses started shutting down their operations. The production of key components slowed or ground to a halt and raw materials were stuck in their countries of origin or in transit, meaning that the production of new cars had to slow down, too.
But the demand for new cars was roughly the same, so consumers either had to purchase cars at a higher price or purchase used cars. Dealerships have been seeing record high profits because they can set higher prices.
Prices fall when there’s too much supply and not enough demand. Dealers have to lower prices to convince consumers to buy the product. But when demand is high and supply is low, dealers can set prices higher because someone will pay the higher price to get what they want.
In the 2008 recession, there were more cars than anyone could sell. New cars sat in the lot for longer because consumers were unwilling to commit to a large purchase in an uncertain time. The 2023 recession is different because the supply is what’s limited.
Another factor in today’s automotive landscape is the shift in what customers want. Even as far back as 2017, auto makers started prioritizing luxury vehicles over cost effective vehicles, and that didn’t change with the pandemic. When automakers only had a limited number of computer chips to make new cars, those limited resources went into producing high end luxury vehicles. The current new car market is a luxury car market.
New cars are also shifting over to focus more and more on electric vehicles, due to customer demand and legislation incentivizing and providing support for increased infrastructure. But electric cars don’t have a strong used car repository because they’re so new on the market, and because the technology is improving in leaps and bounds, so a 20k used EV with a 70 mile radius is much less attractive than a 26k EV with a 249 mile radius. EVs are still mostly a luxury purchase.
Experts say that while the cost of new and used cars is dropping on the wholesales side, consumers aren’t necessarily feeling those price decreases. The cars on the lot may have been purchased at higher prices than the cars the dealership is negotiating for right now. If you’re looking to sell your car, now may be a good time. But if you’re looking to buy a new car, you might want to wait a few months to see how prices fall when demand stabilizes and inventory recovers.
What effect does all this have on refinancing?
Recession or no recession, refinancing your auto loan is a great way to save money.
Because interest rates are high right now, by refinancing now you’ll save money by taking advantage of our zero fees system. You can take another look at your payment terms, too, and lower your monthly payments that way. Check out our article on improving your personal finances to see what you can do to be in the best financial shape you can be in before refinancing.
But maybe you needed to buy a car and took a high interest rate and a long loan term. But now your credit score has improved and you’ve gotten a better job, so you probably will qualify for better terms. Or maybe you want to refinance to take a co-signer off a car loan, or shorten your loan payment term so you can pay what you owe quicker. Rateworks can help– not only can we get you the best rates you qualify for, but there are no fees when you refinance with us, saving you thousands.