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I just purchased a new car a month ago at 3.2% APR. This was the best rate I could get at the time.

I currently have an offer from a bank to refinance at 2.25% APR. For a $25k auto loan, this translates to nearly $700 in savings over 5 years. I confirmed that there are no "strings" attached, in that there are no pre-payment penalties, etc.

Is there any explanation for why banks would refinance at rates lower than a new loan? Or did I just not look hard enough for a good rate on my original loan?

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    One interesting thing that I noted was that CreditKarma.com told me my credit score actually increased immediately after purchasing a new car. I thought this was strange.
    – James Jones
    Commented Apr 13, 2012 at 19:37
  • Actually it is not so common to refinance a car loan at all, not to say at lower rates. I guess you weren't looking hard enough.
    – littleadv
    Commented Apr 13, 2012 at 19:51
  • Maybe the first rate was a 'ripoff'. I've not looked at car loan rates, but my 15yr mortgage is 3.5%, so a shorter term loan should be less.
    – JTP - Apologise to Monica ♦
    Commented Apr 13, 2012 at 23:04
  • At least out here in the Wild West, normal car loan rates for "good" borrowers seem to hover around the 3% mark so I don't think the OP did too badly. That's mostly Credit Union lending for cars 10 years or younger with less than 100k miles on them.
    – Timo Geusch
    Commented Apr 14, 2012 at 13:25
  • Is this actually specific to the United States or can the principles apply generally?
    – George Marian
    Commented Apr 16, 2012 at 1:34

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The simple answer might just be that the increased credit score you mentioned was enough to suddenly make you eligible for this lenders better rate, so maybe that's why you weren't able to get that low a rate before.

Another option I can think of is that this particular bank offers these loans as a "teaser rate" to hopefully get more of your business later on. It's not exactly a loss leader I would think, given the non-existing deposit rates they're probably still able to make money on the spread but they might be able to undercut other banks enough to get their hooks into you. Figuratively speaking, of course.

Of course in order to evaluate if it's worth switching to this deal, you'll also have to look at prepayment penalties and fees on your current loan. These extra costs might be enough to make the switch uneconomic.

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