When is a good time to refinance? Is there a time of year that is better to try?

It is always a good time to refinance your existing car loan…  but sometimes are better than others.  In terms of seasonality, we don’t expect any variance in rates based on time of year. 

Rates are really low now
However, right now in historical terms, is an excellent time to consider a car loan refinance.  The cost of money is very cheap, as mandated by the Federal Reserve policies in an effort to stave off a nasty recession.  This means that banks can borrow short-term money very, very cheaply for the loans that it in turns makes to consumers for longer term loans.  This means that the interest rates that they can offer are quite low.  I’ll explain in further detail why now is the time to lock in the lowest possible rate for an auto refinance. 

The Fed Funds rate, the rate that Federal Reserve lends to other depository institutions overnight, is a lever that the Federal Reserve uses to control the cost of money for banks.  Usually, as the rate declines, money becomes cheaper, and the consumer interest rates will fall as well.  This is done to pump money back into the economy to stimulate more spending. 

As we look back in time, the fed funds rate has declined from 5.25% in Sep 2007 to 0.25%. This means that cost to borrow money is almost zero, which is unprecedented.  Moreover, this rate has been held constant since January 2009.  However, this low rate will not persist for much longer.  There has been much discussion at the Federal Reserve about when to start raising this rate and by how much.  Rates will need to move upward in order to avoid any unwanted inflationary risks caused by keeping the rates low for too long.

Ok – what does all of this mean? 
Auto loan rates are at an historic low, but they are going to go up in the near future; probably within the next 2-6 months.   As a comparable, just this week (April 8, 2010), mortgage rates for 30 year home loans rose to their highest level in 8 months due to Federal Reserve’s decision to end keeping rates low. Rates now stand at 5.21% for a 30 year mortgage.  Rates were at 4.71% in December 2010, which was driven by the Federal Reserve’s desire to keep borrowing costs low for consumers (ostensibly so that they can spend money to stimulate the economy)

Another indicator that rates are at the bottom (and likely will rise soon) is that the demand for Treasury bonds is waning.  More investors are interested in high-return investments, like equities, which dampens demand for government issued debt.  When this happens, prices for bonds decrease (think supply/demand), and consequently the rates for those bonds go up in order to attract investors for these debt instruments.  The yield on the 10-year note rose to 4% for the first time since summer of 2009.

Here’s the Tip 
Lock in your rate now.  Rates are going up – maybe not tomorrow, or the next day, but assuredly within the next 2-4 months.