For the first time in 2025, borrowing costs have decreased, prompting questions about whether this will lead to an increase in refinancing activity. Early indicators suggest that refinancing is gaining momentum.
According to Experian’s Q2 2025 State of Auto Finance Market, refinancing was already on the rise before the recent rate cut. Prime and near-prime borrowers now make up 71% of those refinancing. Additionally, more than half (52%) of prime and super prime borrowers have either refinanced their auto loan or plan to do so. These figures point toward a potential surge in refinancing, particularly among borrowers with stronger credit profiles.
As credit risk declines, competition is expected to intensify, especially from institutions like credit unions that can offer flexible rates. Lenders are advised to monitor these trends closely to capitalize on new opportunities while also managing the risks associated with faster prepayments.
The article notes concerns that refinancing may not always benefit borrowers as much as it appears. Resetting loan terms can sometimes result in higher long-term costs or the loss of incentives such as closing bonuses. Vulnerable groups, including younger and older consumers, may be especially at risk of misunderstanding the implications of refinancing.
Experian reports that borrowers who refinanced saved an average of 2% on their loans (see Experian report: https://www.experian.com/content/dam/noindex/na/us/automotive/finance-trends/experian-safm-q2-2025.pdf?SP_MID=49190-g&SP_RID=21997126-g&cmpid=Auto-US-26-). However, this savings might be less substantial than it seems and could create a false sense of affordability for some consumers.
Lenders face additional challenges when loans are paid off early due to refinancing. Prepayment can trigger refund obligations for ancillary products such as Guaranteed Asset Protection (GAP) and tire and wheel coverage. These product refunds are subject to regulatory scrutiny at both federal and state levels, particularly regarding timing and calculation methods. Outdated manual processes may leave financial institutions vulnerable to errors and increased oversight.
The article concludes by emphasizing that both lenders and borrowers face risks from increased refinancing activity. To address these challenges, lenders are encouraged to adopt automated risk mitigation strategies capable of adapting to changing economic conditions.
Allied Solutions is highlighted as a provider offering insurance, lending, risk management, and data-driven solutions tailored for auto finance companies and financial institutions across the United States. Allied Solutions operates as a subsidiary of Securian Financial Group.
"Refinancing opportunity isn’t without risk for both borrowers and lenders. While this risk hasn’t materialized on balance sheets yet, idling can lead to silent accumulation of additional risk."
"To combat passive absorption of risk, lenders need a highly automated, sound risk mitigation strategy that can weather the changing economic conditions."
Learn more about holistic risk mitigation solutions.