Should I refinance my auto loan

January 23, 2008 8:07 PM

Is it worth refinancing my auto loan since the Fed made a cut? My current interest rate is 3.90%, can I do better than that, and if so, where?
posted by mgrimm to Work & Money (12 answers total)

I'm no economic expert, I'm sure more knowledgeable people will chime in soon, but I don't think there will be enough of a direct effect from the rate cut to warrant refinancing your auto loan. I spoke to my bank about refinancing our home loan, and there was a slight drop in that rate, but nothing as drastic as the fed cut.
posted by shinynewnick at 8:55 PM on January 23, 2008

Refinancing might make sense on a home loan (where the principal is six figures and up) but it hardly has much of a benefit for an auto loan. Do the math with the interest rates and you'll see that what you save is chump change. Unless you bought a Maserati.

Also, 3.90% is pretty damn good.

Go spend your time on something else :)
posted by intermod at 9:11 PM on January 23, 2008

A quick Google search turned up this article about the impact of the latest rate cut.

From the article:

Borrowers with car loans won't be helped much because those loans typically have four or five-year terms, and borrowers pay a larger share of principal – and a smaller share of interest – every month. So a change in the interest rate doesn't make too much difference.
posted by burnmp3s at 9:11 PM on January 23, 2008

Rates for car loans aren't tied to the Fed Funds rate. That rate is only used between banks. Consumer loans are usually tied to other things. The rate cut sometimes indirectly trickles down to other types of loans, but I doubt it would to a car loan.
posted by answergrape at 9:18 PM on January 23, 2008

3.9% is extremely good. It's unlikely you could find anything better; even if you did any associated costs would probably outweigh the small drop in interest rate.
posted by 0xFCAF at 9:38 PM on January 23, 2008

First, assume for the sake of calculation that your time is worth exactly $0.

Now, using a loan calculator, figure out how much interest you'll be paying on your current loan, starting with NEXT month's payment.

With that dollar figure in mind, see if you can do better. Let's say you find a deal for 2.9% (although if you do, for god's sake tell me where without getting a new car through dealer-incentive financing!)

Again using the loan calculator, figure out the total cost of the refi in interest over the life of the new loan, plus any fees etc. and additional principal owed due to the refi.

If the numbers are even close, don't even bother. If there's a clear win, run with it (or stay put.) Only break this rule if you get something else out of it (like lowering your monthly payment by extending the loan, which will ultimately cost you more, but at that point overall cost is probably no longer your goal.)

That's the fun of money: it's just numbers, so answers are easy.
posted by davejay at 10:14 PM on January 23, 2008

A 3.9% loan is absurd. At that rate, it actually makes more sense to take out a car loan than to pay cash for the car.

My assumption is that you got some sort of promotional rate, and there's basically no way you'll find anything lower, no matter what the Fed does. 3.9% is crazy-insane good.
posted by Tacos Are Pretty Great at 10:41 PM on January 23, 2008

3.9% is actually break-even, Tacos. I'm getting ~5% at HSBC and Citibank, but after that money goes through the .65 marginal bracket filter it's only 3.25%.

If present trends hold I expect the return of 0% and sub-3% interest rates at 60 months.

But to answer the question, retail auto loans are 2-3% above 3.9% and they don't get their money straight from the Fed so refinancing doesn't look to be in the cards.
posted by panamax at 10:48 PM on January 23, 2008

Where are you getting 3.9%? That's really good. If you want to compare the effect of rates, just calculate the future value of the annuity, using a handy calculator like this. You'll need to either express your car payments as an annual amount in the Payment Amount field or divide your 3.9% rate by 12 for the Interest Rate Per Time Period Field. Unless you have a lot of years remaining, it's unlikely you should bother refinancing.
posted by yerfatma at 7:02 AM on January 24, 2008

To back up what others are saying, 3.9% is extremely good, and I got that rate from a auto dealer a couple years back. My bank, which is a credit union and typically has *excellent* rates for loans, wasn't able to get within half a percentage point of that. This was back in 2004, when interest rates were pretty low in general. You're doing perfectly fine where you are.
posted by LionIndex at 8:17 AM on January 24, 2008

An economist on Public Radio International's Marketplace said it takes about six months for the Fed's rate cuts be reflected in consumer loans.
posted by HotPatatta at 8:38 AM on January 24, 2008

Response by poster: Thanks for all the great responses, I'll focus my energy on something else.
posted by mgrimm at 3:30 PM on January 24, 2008