Last year was a record year for auto manufacturers with over 17 million vehicles sold, many of which were financed. This puts the unpaid balance of auto loans in the U.S. at a record, with more than $1 trillion in outstanding loans. With borrowers continuing to face financial stress, some wonder if refinancing their auto loans would provide as much relief as refinancing a mortgage.
Many auto loans are currently made for more than 60 months, which can equate to a large amount of interest paid for those who do not qualify for low interest rates. Subprime loans, which now make up about a fifth of all auto loans, can carry rates in the double digits. The average subprime loan has a rate of 10.4%. For loans that are six or seven years long, borrowers are paying a large amount of interest that refinancing could reduce.
Many can refinance their auto loan down to around three percent, a sizable saving. While refinancing at these rates does require the borrower to have a strong credit score and a debt-to-income ratio that lenders find acceptable, even those with some credit problems may be able to reduce their monthly auto payments by $50.
However, refinancing auto loans is not for everyone. Those who have fairly low rates may find that dropping a few additional percentage points does not help their monthly payment.
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