Study notes spike in refinancing just days after auto purchases

Once you've waded through all the paperwork for an auto loan, you might feel little impetus to do any more work on it. You've worked out the terms, and will simply make the monthly payments as they come.

However, a recent study by the credit bureau TransUnion observed a spike in refinancing activity shortly after a vehicle purchase. Some drivers opted to tinker with the loan just days after receiving the keys to their new vehicle, often resulting in a considerably lower monthly payment or interest rate.

"TransUnion found that a number of consumers are taking advantage of the opportunity to refinance their new purchases, despite the rising interest rate environment," said Brian Landau, senior vice president and automotive business leader at TransUnion. "Consumers who might be paying a somewhat higher interest rate on the loans they obtained through the dealership may find that refinancing can lower those interest rates or extend the loan term – in other words, help those same consumers manage their monthly cash flows."

Landau said drivers were most likely to refinance their auto loan within one or two days of purchase if they were looking to take advantage of loyalty programs and bundled options. The study found that refinancing resulted in an average monthly payment reduction of $52 and an average interest rate reduction of 2.4 percent.

"In an increasingly competitive auto finance market, there is a lot of potential for auto lenders to tap into refinancing as a way to grow their business," said Landau. "Nearly two-thirds of auto finance companies offer refinancing, but according to a recent Harris poll, less than half of consumers are aware they may use this option as part of their overall financing strategy. Broader recognition of this option can benefit both consumers and lenders seeking new business."

Quick refinancing can have an immediate benefit. Justin Pritchard, writing for the financial site The Balance, says lowering the interest rate can not only lower your monthly payment, but also the amount of money you'll be paying over the life of the loan, since the bulk of interest payments are made at the beginning of a loan. Some lenders may also refuse to refinance a loan on a vehicle older than a certain age.

Drivers should also be cautious about refinancing, however. Extending the loan term for a lower monthly payment will result in higher interest payments over the life of the loan. Since vehicle depreciation occurs most rapidly in the first few years, you'll need to make sure the vehicle is still worth more than the loan balance. Lance Cothern, writing for the financial site Lending Tree, says this situation is usually required for refinancing to be approved.

Auto loans may also have prepayment penalties, although you may be able to save more than this cost if refinancing lowers the rate sufficiently. Drivers should be careful about getting a pre-computed interest loan, since this fixes the payment schedule; refinancing this type of loan will end up costing you money instead of giving you savings.

The TransUnion analysis, which looked at auto loan originations between 2015 and 2017, determined that new vehicle loans were up 5.5 percent in the third quarter compared to the quarterly average for the rest of the year. Landau said factors influencing this increase include pleasant weather for auto shopping and the introduction of new models. This year, he posited that the possibility of tariffs is also influencing buyer behavior, as drivers seek to close a loan before retail prices increase.

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