For the first time in four years, the Federal Reserve is officially dropping interest rates. On September 18, the Fed announced a 0.5 percentage point reduction in its benchmark rate. The rate cut is expected to be the first of several, and it comes at a time when the benchmark rate sits at the highest level since 2007. For car shoppers, falling interest rates point towards an improving buyer’s market ahead. But what about those who already bought a car? Who should be looking to refinance their auto loan now that interest rates are falling? Here’s how the math plays out for borrowers.

Who Should Refinance Their Auto Loan Right Now?

For borrowers who have seen a big improvement in their credit scores since taking out their auto loan, refinancing now makes sense. With September 2024’s 50 basis point (0.5%) cut in the Federal Reserve’s benchmark interest rate, those with better credit can secure more favorable loan terms and start saving right away. If your credit score has improved by 50 points or more, refinancing now makes sense. Refinancing allows you to lock in a better rate and lower your monthly payments, in addition to reducing the total interest paid over the life of your loan.

For example, let’s say you have a $25,000 loan at 10% APR over a 60-month term. Since taking out the loan, you’ve improved your credit score from 650 to 700, and your debt-to-income ratio is looking better. Refinancing that loan today at 6.5% APR would save you around $2,300 in total interest over 60 months. While future rate cuts may offer even more savings, refinancing now allows you to start seeing financial benefits immediately.

Who Should Wait To Refinance?

For others who haven’t seen a major improvement in their credit score yet, it makes more sense to wait for additional rate cuts while continuing to work on improving credit. Some economists predict that the Federal Reserve could lower rates by another 1.5-2.5% from late 2024 through 2025, offering even better opportunities to save by refinancing.

In the meantime, focus on improving your credit score and debt-to-income ratio. This will ensure that when the rates drop further, you’ll qualify for the most competitive offers. Paying bills on time, reducing debt, and maintaining a low credit utilization ratio are all steps that can boost your credit score and position you for better refinancing terms when the time is right.

More Rate Cuts To Come

The Federal Reserve is highly likely to lower rates yet again on November 7, 2024. Additional rate cuts will follow in December and 2025. In other words, auto loan rates will fall further in the months ahead. So, what should you do with your current car loan? The best decision depends largely on your current credit situation. If your credit score has improved since you first took out your loan, refinancing now could offer immediate savings, especially with today’s lower rates.

However, if your credit score hasn’t improved much, waiting might be the smarter move. With the likelihood of additional cuts by the Fed, combined with a stronger credit score, you’re likely to secure even better refinancing terms and see greater savings. You can always calculate how much a lower interest rate would save you using a free calculator. 

In either case, staying informed about rate trends and working on your credit score will ensure you’re in the best position to benefit from refinancing—whether you decide to act now or wait until 2025. 

👉 Learn more about strategies for saving on auto loan interest (free guide)