How to Save Thousands on Your Auto Loan by Refinancing

Man inside car fanning hundred dollar bills.Planning on buying a car and wondering how to save on your loan? Saving money on your auto loan is easier than you think but you have to be proactive: the best way to save on your loan is through refinancing. You can lower your interest rate and save hundreds if not thousands of dollars, just like on your mortgage.

In the following, I’ll explain why you can save so much money and how to do so.

How Auto Dealers Make Their Money

Over 100 million Americans have an auto loan and combined they owe more than $1.3 trillion dollars. Roughly 79% of those car shoppers get their loan at the dealership and that’s the problem: People only shop for their cars; they don’t shop for their car loans!

Do you really think the car dealer will give you the best loan? Car dealers make thousands on an average car and have four sources of revenue:

  1. The margin on the car (i.e., buy cheap, sell expensive)
  2. The margin on your trade-in (same: offer little, sell for more)
  3. Extended warranties and other protection plans
  4. Financing referrals

a. Front-End Profits on Car Sales

The margin on the car is likely lower than you would think. Dealers don’t make ‘thousands of dollars’ on a car anymore. Over the last several years, the so-called front-end margin decreased from 10% to 8% due to increased competition and increased price transparency for consumers. The margin on your trade-in is practically the same as the margin on the car you’re buying.

b. Back-End Profits on Car Sales

The real money for the dealer is on the backend. Margins on extended warranties and other protection products, for example, are very astronomically high:

  • On a $2,000 extended warranty, the dealer makes up to $1,000 in profit
  • On a $700 GAP insurance, the dealer makes up to $550 profit

c. Dealer Financing

The most lucrative business for the dealer, however, is your financing. Auto loan companies that work with dealerships pay dealers referral fees to get business. Unless you have perfect credit, dealers markup the rates on your loan and you don’t even notice.

If your rate is 11%, the dealer may have marked it up from 9% in order to make more money on the deal. The 2% markup over the course of your loan goes almost entirely into the dealer’s pocket.

To provide some context: if you buy a car for $30,000 and finance it over a term of 60 months / 5 years, your dealer makes approximately 2% on $30,000 for 5 years. That’s easily $3,000 and you can recapture that through refinancing.

As a result, dealers often make more money on your financing than on the car, the trade-in and all the other protection products combined.

You Will Overpay on Your Auto Loan Unless You Refinance

If the dealership gets paid for the loan referral and makes money on the interest rate markup, you can see how you won’t get the best auto loan from the car dealership. Quite the contrary, the second you drive off the lot, you already qualify for a better rate and can realize those savings through refinancing.

– Prime Credit Borrowers

The dealer, however, isn’t the only reason why refinancing an automobile can save you hundreds if not thousands of dollars: 38% of Americans have prime credit, i.e., they qualify for car loans with the low interest rates. If you are one of those Americans, you know what your rate is – the prime credit segment is very transparent.

– Nonprime and Subprime Credit Borrowers

If you are one of the 62% of Americans who don’t have prime credit, however, your rate will be much higher. Let’s assume you have a credit score of 600 and are paying a rate of 11% annual percentage rate (APR) on your auto loan. What do you think will happen if you make your next 6 / 12 / 18 payments in full and on time?

If you are disciplined and make your payments, your credit score improves, and you qualify for a lower interest rate. Sadly, your current car loan rate doesn’t change! It stays at 11%. Even if you call your auto lender, you will not be able to lower your rate and save.

Hence, unless you take action and refinance you will overpay on your vehicle loan.

Why Auto Loan Refinancing is So Uncommon?

As described above, you are overpaying on your auto loan because dealers mark up rates and the auto loan companies don’t lower your rate even if you improve your credit. Consequently, auto loan rates are all over the map and refinancing could save you hundreds if not thousands of dollars.

There are a number of guides on how to refinance your auto loan. Nevertheless, we found that people still don’t refinance their loans because the savings are ‘just’ $50 a month and you need to visit the branches of multiple banks and credit unions to get the refinance done.

Most People Don’t Realize How Much Money They Can Save

Lots of Americans simply don’t get off their couch for ‘just’ $50 a month if they have to make many trips to banks and have no certainty around how much they will really save. $50 a month, however, is a lot of money when you realize that you have 60 months of payments ahead of you. $50 x 60 months means you could be saving $3,000 or more over the term of the loan.

We believe it is just a matter of time until traditional banks and other lenders wake up and move their refinancing programs online. Today, however, most of them won’t allow you to refinance your car 100% online and from the comfort of your couch.

Is There a Catch to Auto Loan Refinancing?

Lower your interest rate, reduce your monthly payments, save money and get cash back – sounds too good to be true? Naturally, you are wondering ‘what’s the catch?’

* You Need to Make Your Car Payments Ontime

Being disciplined and making all your payments in full and in time is hard work. You are creating evidence that you are indeed creditworthy or more creditworthy than your credit score suggests. That’s why the score is improving, and you qualify for a lower rate to begin with.

* There Are Some Refinance-Related Fees

Other than the hard work that goes into making your monthly payments, there are only minor charges when you refinance your auto loan: there will be small DMV fees for changing the lienholder on your title and maybe a couple of dollars in administrative fees.

None of these fees are due in cash. Instead, they get rolled into your new loan and will end up costing you a few more cents per month.

The Bottom Line on Refinancing Your Auto Loan to Save Money

In summary, unless you have perfect credit and get your loan at a major bank or credit union before you go car shopping, you are likely overpaying on your current loan. You can save hundreds of dollars on your loan when you buy a car through refinancing it shortly after.

You have to be proactive because your current auto loan company won’t offer you a lower rate. Instead, you either have to shop around and visit a number of banks or credit unions or you work with an online company to refinance your auto loan.

Nicholas Hinrichsen author photo.Nicholas Hinrichsen was born and raised in Germany, played on the German national Golf team, studied computer science and finance, and worked for a renewable energy investment company before moving to the U.S. in 2011.

After graduating from Stanford Business School in 2013, Nicholas Hinrichsen started a company called Carlypso with his friend Chris. In 2017, they sold their company to Carvana.com and later went on to create the auto loan refinance company WithClutch.com.

Borrow up to $50,000 with low fixed rates!

Posted on August 25, 2022 by in Auto Loan Refinancing

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