When Can You Refinance a Car Loan?

When can you refinance a car loan? Anytime you want. It’s faster and easier than refinancing a mortgage. There are some things to consider first, however. Whether your goal is to get a better interest rate or a lower monthly payment, refinancing your auto loan could help, but it’s not the right move for every situation. So before you call the bank, review these tips to learn how to get the best deal.

What It Means to Refinance Your Car

So, what does it mean to refinance? It means taking out a new loan to pay off the original one; and doing so could save you a lot of money. The term can match the duration of your existing loan, or you can get one that’s longer or shorter, depending on your needs. Many borrowers choose to extend the length of their repayment period, giving them more time to pay off the debt. However, this practice will likely reduce or eliminate any savings you get by refinancing.

When Can You Refinance a Car Loan?

You can refinance a car loan anytime you want. Nevertheless, some lenders could make you wait six months or more, while others don’t have any set waiting period after you purchase a vehicle. Regardless of who gives you a new loan, the bank can’t refinance your car until your original creditor receives the title or certificate of ownership from the dealership or previous owner. This process can end up taking months.

Reasons to Refinance Your Auto Loan

Does it make sense to refinance your car loan? If you recently bought your wheels, you may realize that your payment or interest rate isn’t competitive with the market, or perhaps you’re simply unhappy with your financial institution’s performance. Just remember, you should only refinance your car if it benefits your situation. Here are a few reasons why car owners should consider refinancing:

You Got a Bad Loan

Refinancing your vehicle’s payment may be a smart financial decision if you take on a high-interest rate loan. Auto loans are tied to the prime rate, which has been on the rise lately. If the finance manager quoted you a rate you can beat on your own with a new lender, do it. Interest rates may have decreased since you purchased the car, or perhaps your dealership padded the rate to boost their profits. Either way, it’s best to avoid this situation in the future and get preapproved before you go shopping.

Your Credit Rating Improved

Buying a vehicle on credit will improve your rating. As long as you make on-time monthly payments, that is. Even after just 12 months, your reliable track record could result in a nice spike on your credit report. Armed with an improved rating, you may be able to qualify for a significantly lower interest rate. There are a few other ways you can boost your overall score, including:

Pay off outstanding debt.Increase your income.Add new credit accounts.Dispute any errors.Use no more than 30% of your available credit.

You Found a New Lender

If you’ve developed a relationship with another lender, leveraging that situation could save you a few dollars each month. Joining a credit union could also come with member benefits, like special deals on auto loans. Some financial institutions will also refinance your initial loan with appealing rates to help attract new customers.

You Took the Rebate

Auto manufacturers routinely offer incentives like low-interest rates and rebates to boost sales. If you opted for the cash instead of the rate break, you might want to refinance your loan. Borrowers with excellent credit could end up benefiting from both perks. For example, you could take a $2000 rebate with a 7 percent interest rate, then shop around for a lower percentage rate from another bank over the next few months.

You Can’t Make the Payments

If you’re struggling to make your monthly payments, especially within the first year of car ownership, refinancing could provide you with some relief. Check with your current lender first, though. They may also be willing to extend the new loan beyond its original ending date or give you a reduced interest rate to keep your business, and both options will help lower your bill.

You should understand that refinancing an auto loan with a longer repayment period could end up costing you more in interest over the life of the loan. It might be best to keep your new term for only a short time. You can also make extra payments when you can to reduce your principal balance faster.

Your bank may offer you a cash-out refinancing option. With this option, your new debt will exceed what you owe, so you can get extra money to spend however you wish. This strategy is risky, as your debit could exceed your vehicle’s value, putting you “upside down” if you decide to sell it or trade it in for another car despite a potentially lower payment.

You Have Other Goals

Whether you want to take an extended vacation or start a business, adding a few dollars to your monthly budget can help you achieve other worthwhile pursuits. Most car lenders don’t charge origination fees, although you’ll likely pay a modest title transfer fee to your state’s motor vehicle department. Because it’s so cheap, you can theoretically refinance as often as it makes sound financial sense.

Drawbacks of Refinancing an Auto Loan Early

Depending on your situation, there can be advantages to sticking with your current loan. You don’t want to do anything that could adversely impact your finances, so consider these factors before refinancing your debit:

Failing to Qualify

Any time you apply for an auto loan, you run the risk of a denial. But, even if you do get approved, it’s possible that you already have the best interest rate or you don’t meet the standards for a top-tier one.

Early Payoff Penalties

Some car lenders may have prepayment penalties or other fees if you repay your initial loan early. So before you take your business to another lender, check with your bank and inquire about early payoff fees on your loan.

Risk of Repossession

Regardless of your current financial hardships, try to avoid cash-out refinancing. This method is reserved as a last resort because you’re putting your vehicle at high risk of repossession. If that happens, your situation will only get worse. If you’re experiencing a crisis, you can contact the National Foundation for Credit Counseling for help.

Changes to Your Credit File

Every time you apply for car loans, the bank will pull a copy of your credit report. This process is called a “hard inquiry,” It will always cause your score to dip slightly, at least initially. But, because the three major credit bureaus understand you need to shop for both cars and rates, all hard credit pulls done in a 14-day window won’t hurt your credit score more than just one hard inquiry.

How to Refinance Your Car Loan

There are a few steps to take after you decide to refinance your new or used automobile. You’ll follow the same general process as you did when you applied for your existing loan, with a couple more considerations, like:

Analyze Your Current Debt

Your first task is to verify the information on your loan payments. Log in to your bank’s online system and access your account information. It should be part of your profile, but if not, pull your old loan documents out of the file cabinet or call customer service for help. You want to determine the interest rate you’re currently paying and how much you still owe.

Check Your Credit

It’s also wise to get your current credit score so you’ll have some idea about whether you’ll qualify for the best advertised interest rates to save money. For a typical automotive refinance, you’ll need a rating of at least 600. There are plenty of subprime lenders that will charge you high interest rates. However, that defeats the purpose here. With everything equal, including debt-to-income ratio, earnings, and credit age, the average borrower has a credit score of 714.

Verify You Can Refinance Your Car

Not every bank will finance every car’s monthly payment. For example, there may be age restrictions or payoff limits, and many creditors won’t refinance the loans they originated, for a good reason. It’s in their best interest to keep you on the hook for the entire term. Find out whether your vehicle meets the requirements for refinancing before you spend time filling out an application.

Do the Math

Running the numbers is always a good plan when you’re making financial decisions. You’ll need to take a close look at your income and expenses to ensure any changes you make to your current auto loan won’t have unexpected consequences on your budget and long-term financial plans, especially if you plan to extend your term.

You’ll want to use an online calculator to estimate your savings, if any. You’ll plug in the numbers you collected from the bank, how much you want to borrow (if that isn’t your loan balance), and the number of months you want to pay. Remember to factor in potential prepayment penalties, if applicable to your loan, and an extended warranty. Remember that the resulting figures are just a guess, and your actual interest rate at signing will make a difference in that number.

Contact a Few Lenders

We recommend you apply with multiple lenders. By making this effort, you’ll be in a terrific position to pick and choose the best offer. First, compare each bank or credit union’s rates and terms, then consider other factors like quality customer service, overall reputation in the marketplace, and convenience. Whether you want to interact online or in person, your dealings should be pleasant, if not effortless.

When to Refinance a Car Loan

In most cases, the best time to refinance your payments is as soon as possible. Once you decide to go for it, the longer you wait, the more your current loan will cost you. Yet there are some strategic advantages to your timing, such as:

Between 60 and 90 Days

One thing to remember is that the earlier you refinance, the more you can save money. Because it can take the previous owner and motor vehicle department months to transfer the title, you may have to wait up to 90 days to refinance your loan. This waiting period is the ideal time to prequalify for your new loan, so you can leisurely compare rates and offers.

Between 6 and 12 Months

Waiting six months or more into your loan term before you apply for refinancing gives your credit score time to recover from any temporary declines. For example, when you applied for the car’s original loan, the hard inquiry probably lowered your rating slightly.

If your goal is to find the lowest interest rates and reduce your monthly payments, it makes sense to wait until you can qualify for a rate that’s lower than what you’re currently paying, as this change could result in a higher interest rate on the new loan.

If you don’t have a long credit history or you’ve had issues in the past, consider waiting at least a year to refinance. This way, you’ll have plenty of time to build a history of on-time payments, satisfying some lenders’ application requirements.

During the Final 2 Years

To realize any genuine benefits from auto refinancing, don’t wait too long. The time to start with the process is when you have at least 24 monthly payments left. Because you’ll pay the bulk of your interest at the beginning of your debt, the potential for savings drops if you refinance too late. Many lenders also limit when you can refinance late in the loan. Those requirements vary by institution, and factor elements like:

Months left on the termRemaining balanceAge of the vehicleOdometer reading

Is It Too Late to Refinance My Car?

There are typically only two instances when it’s probably too late to refinance your car, including:

The Loan Term Is about to Expire

When you’re near the end of your loan term isn’t the best time to refinance an auto loan. If you’ve been paying on your vehicle for three years or more, do you really want to start over with a new loan when you’re so close to paying it off? If you need to lower your car payment this close to your payoff date for financial reasons, consider trading in your current vehicle for a less expensive model you can afford more comfortably.

You’ll Pay More Than It’s Worth

Another mistake is to extend your loan repayment terms for additional years, because you could be in debt for more than your car is worth. Also, when you take out a new loan on a car you’ve had for a long time, it may have lost much of its value because of mileage and normal wear and tear. In that case, you’ll also be upside down in your new car loan, and you don’t want to put yourself in either of these situations.

As you’ve learned, it’s possible to renew your vehicle’s funding just about anytime it suits you. So evaluate your interest rate and terms routinely to ensure you’re getting the best deal, keep your credit score high enough to qualify, and submit an application with your preferred lender.