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Auto Refinance

AUG 29, 2022

What a recession means for your car loan interest rate

When it comes to your car, a recession or economic downturn can have a big impact.



10 min read

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Talk of a recession is never good news, and people often think about how it will affect their jobs and finances. However, when it comes to your car, a recession can also have a big impact. From increasing interest rates in a pre-recessionary period, to decreased spending power and potential auto part shortages as the recession hits, an economic slowdown can negatively impact your financial situation, vehicle equity, and viability of your car loan. Here is what you need to know about when it comes to your car and economic downturns.

What is a recession?

A recession is when an economy shrinks for at least 6 months. Recessions can be caused by lots of different factors, but when a recession is triggered, it’s normally not good news for the majority of households. It is triggered by at least two successive fiscal quarters where an economy shrinks with lowered gross domestic product, or GDP. A recession can mean loss of working hours or unemployment for some people and tightening budgets for many more. Because of concerns about the health of the economy and the future of people’s livelihoods, many households choose to spend less money and save more.

This can lead to a decrease in profits for both corporations and small businesses, and more potential job losses and business cutbacks and/or closures. While recessions are signs of a naturally expanding and contracting economy, failure to plan for them often leads to increased stress and strain on your family’s expenses. If a recession continues for long enough, it can turn into a depression which is the next worst phase in a downward trending economy that can potentially last for several years.

Don’t worry. A recession doesn’t have to be all bad news. Keep reading for tips on how you can better secure your car loan and plan your finances.

How is a recession different from a depression? 

You may have seen comparisons between a recession and depression as well. However, they are not the same. A recession differs from a depression in a few ways. Recessions are normally triggered after two quarters of negative GDP growth, and can represent a temporary slowdown in economic activity. Depressions, on the other hand, are much more serious with significant impacts to economic growth, employment, and the production of goods and services. 

A full-fledged depression can result in layoffs and unemployment increases in many sectors of the economy. Unlike a recession which usually lasts for less than a year, depressions are sustained periods of economic strife which can leave many people in a precarious financial situation. During a depression, economies experience substantial slowdowns in production, cutbacks on spending, and prolonged periods of economic shrinkage.

An economy can enter into a depression if a shorter term recession leads to years of declining economic activity without a positive upturn. The differences between the two aren’t always exactly clear, so the best way to gauge a continued progression is by looking at the duration of the situation and the overall impact and consumer sentiment.

The good news is, we're NOT in a depression. We're currently experiencing a recession, not a depression, so the impact to your financial health will likely be much more manageable.

Recessions and interest rates

When the signs of a recession are emerging, governments and central banks will often take steps to try and fix things before they get too bad. Governments might implement economic policies that can restart economic growth, or policymakers might choose to change interest rates to keep the economy afloat.

Interest rates usually increase before a recession takes place. These hikes are usually done for a few reasons, including to help to ease inflation and decrease consumer spending. This practice helps to balance consumer spending habits if market demand is greater than the available supply of goods and services.

During a recession, interest rates typically decrease. This is because policymakers want to encourage people to spend more instead of saving. However, as previously mentioned, interest rates often increase before a recession to combat inflation. In the case where inflation and prices are steadily rising across the country, policymakers will sometimes have to raise interest rates before a recession occurs or possibly even early on during a recession to keep prices lower, just as we discussed in why interest rates change.

If the federal funds interest rate goes up, it becomes more expensive for banks to borrow money from the Federal Reserve. This means that consumers and households can face higher interest on loans, and as a result, mortgages, loans, and other financial products are more expensive when it comes to making payments to pay them back.

Car loan interest rates

So what does this mean for you? Well, it can mean a few things if you’re looking to take out a car loan and a recession is looming on the horizon. If interest rates increase, you can also expect your car loan repayments to come with higher interest repayments too. For this reason, if you’re looking to take out a car loan ahead of or during the early stages of a recession, be aware and plan ahead with your car budget. It may be harder to take out an affordable car loan during a recession.

However, there’s always a way you can get a car loan. Even if interest rates are adjusted or hiked multiple times, it can still take some time for the ripple effect to be registered and passed down to you through lenders. For example, if the Federal Reserve were to raise the base federal funds rate tomorrow, it may take a few days or even weeks before you are impacted as you try to qualify for a car loan or refinance your current loan.

Did you know?

If you choose to refinance your current car loan, your quotes are locked in and usually good for up to 30 days! See how you can refinance through Caribou if you are worried about future rates. See your savings within minutes.

The best time to take out a car loan or to seek out a refinancing offer is at the earliest point before a recession begins — potentially before interest rates have been increased. If you are thinking about refinancing your car then, you may still be able to get an affordable interest rate on your loan.

The longer you wait before a recession, you may see increasing interest rates associated with the loan.  Moving quickly and early can be a good option when it comes to handling loans and recessions.

Vehicle equity and the value of your car

Recessions may also impact the value of your car along with your auto loan’s interest. Because households need to start tightening their budgets, many people will be more reluctant to spend money on cars that will cost more to buy, drive, and maintain. After all, spending more money on a car along with increased expenses due to things like the rising cost of gas or paying more for an expensive insurance policy because your car is newer isn’t that great of an idea when you can afford less.

Selling your vehicle can be more difficult during a recession. Between more expensive loan options, less disposable income, and reduced car buying demand, selling a car to get your money out of it can be tricky. Some dealerships may slash prices on new cars to move vehicles and generate buying interest. The lower asking prices also impact the values of trade-ins and used vehicles since the dealers have a smaller profit margin.

If you are trying to sell your car during a recession, you can either absorb the market price decrease or try to wait it out to see when the economy begins to trend upward again.

When in doubt, it may be worth just holding on to your vehicle during a recession and paying off more of your car loan while waiting for a good opportunity to refinance. Getting a more favorable interest rate can mean a lower monthly payment so you can hold on to more of your hard earned money each month.

Auto part supply problems

The production of goods usually decreases during an economic downturn and there can be shortages in the supply of car parts during a recession. As mentioned already, recessions don’t always have a major impact on all sectors of the economy, but they can more easily affect import and manufacturing companies. This is because they often move products internationally, source components from multiple countries, and deal with currency fluctuations.

If a recession takes a particularly tough toll on the manufacturing sector, you may find that auto part supplies are restricted due to things like reduced demand, raw goods shortages, cash flow problems, and staff reductions. These roadblocks can mean that finding the right parts to repair your car can be harder to come by.

Auto part shortages can affect both new and used vehicles. From electrical chips and electronic control units, or ECUs, down to simpler components, shortages can mean fewer new cars are produced and brought to market. For used cars, the shortages can send auto repair shops scrambling to find other sources of parts from aftermarket suppliers.

The aftermarket part distributors can help keep cars on the road for a period of time if the original manufacturer equipment, or OEM, sources are limited. They can also be cheaper than brand new parts or OEM components.

If your budget is a little tighter, using aftermarket components could be a good cost-effective way to maintain your vehicle going forward during an economic downturn.

Planning for a recession

It’s very hard to know when a recession will occur, but it is a good idea to plan ahead. There are a few simple things you can do to get ready. First of all, it’s always a good idea to start limiting your expenses and have a budget to monitor your expenses. To find out more about reducing and limiting your car expenses, see our guide on reducing vehicle expenses.

Optimize your loan

If you’re looking to refinance your car or take out a new car loan, it’s a good idea to try and figure out your financial situation as early as possible. Before a recession, waiting until rate hikes set in before sorting out your loan can mean that you’re less likely to take advantage of lower interest rates.

Pay down some of your debt

It can be good to try paying down as much of your car loan as you can before the onset of a recession. If interest rates rise, and your vehicle’s equity drops, you could find yourself “underwater” on your car loan while paying more monthly interest than you need to. You may be unable to refinance at this point depending on lender requirements and the specifics of the loan you’ve taken out.

Maintain your vehicle

Taking care of scheduled vehicle maintenance ahead of time can be a good move to futureproof your vehicle. And, if you’re looking to make ongoing repairs or upgrades to your car, it will also be wise to stockpile the parts you need as early as possible, before any shortages start to disrupt supply lines and production.

Being prepared

Recessions can cause problems for many households. But, with the right preparation, a recession doesn’t need to make maintaining your car or making your car payments difficult. As they say, “Hope for the best, but have a plan for the worst.” We can work together to get through these hard times and make your finances better and more stable in the process. At Caribou, we’ve been saving drivers time and money when it comes to finding the right refinancing option. Find out more about how refinancing works.

Our content is intended to be used for general information purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances and consult with your own investment, financial, tax and legal advisers.

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Caribou Insurance Services, LLC
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* This information is estimated based on consumers who were approved for an auto refinance loan through Caribou on or after 1/1/2022, had an existing auto loan on their credit report, and accepted their final terms. As of 9/27/2022, borrowers who refinance save an average of $111.16 per month. Refinance savings may result from a lower interest rate, longer term, or both. There is no guarantee of savings. Your actual savings, if any, may vary based on interest rates, the repayment term, the amount financed, and other factors.

+ To check the refinance rates and terms you qualify for, we conduct a soft credit pull that will not affect your credit score. However, if you choose a loan product and continue your application, we or one of our lending partners will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

++ Social security number is required should you choose to move forward in the loan application process.

** APR is the Annual Percentage Rate. Your actual APR may be different. Your APR is based on multiple factors including your credit profile and the loan to value of the vehicle. APR ranges from 2.32% to 36.00% and is determined at the time of application. Lowest APR is based on loan amount of $45,000 and is available to borrowers with excellent credit and only in certain states. Advertised rates and fees are valid as of 8/5/2022 and are subject to change without notice. Lowest rate of 2.32% APR only available with a 36-month repayment term. Insurance savings will not result from lower APR.

Terms and Conditions apply. Caribou reserves the right to modify or discontinue products and benefits at any time without notice. Participating lenders, rates and terms are also subject to change at any time without notice. The information you provide to us is an inquiry to determine whether our lenders can make you a loan offer. If any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. We do not guarantee that you will receive any loan offers or that your loan application will be approved. If approved, your actual rate will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Offers not available in MA, MD, MS, NE, NV, WI, WV.

Insurance products offered through Bindable and Caribou Insurance Services, LLC. Caribou is working with Bindable who owns MyLifeProtected and MassDrive Insurance Group, LLC, the licensed agent for all products.