When Is a Good Time to Refinance a Car?

You probably had to take out a loan when you purchased your vehicle. You’re not alone. Most drivers need financing to pay for such a high-priced item. And when you took out your loan, you may have had a less-than-stellar credit score or been in a tough financial situation that affected the terms of the loan you received.

But that’s OK because, at some point, you can probably refinance the loan to get better terms or a lower interest rate, which could translate to lower monthly payments.

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Of course, there are times when it may be better to refinance a car loan, and knowing when to apply for a new loan can help you save on your monthly car payment. Let’s go over when a good time to refinance is and when you might want to avoid doing so. We’ll also outline how to refinance if you decide it’s right for you and your budget.

When Is a Good Time to Refinance Your Car Loan?

The best time to refinance a car loan isn’t the same for everyone, as it depends on your unique situation. People choose to refinance for several reasons, but it’s often beneficial to refinance if one or more of the following situations apply to you:

Your Credit Score Has Improved

If your credit score is better now than when you first took out your auto loan, refinancing can likely get you a lower monthly payment. Your credit score plays a major role in the interest rate a lender offers you when you borrow money, which affects your monthly payment and the interest you pay on the loan over time.

For example, if your credit score was in the 650 range when you took out your auto loan but you’ve since increased it to over 700, you could lower your interest rate by a few points or more. This translates to a potential saving of hundreds of dollars in interest over the life of the loan. A higher credit score makes you less of a risk to lenders, so they’ll be more willing to give you better loan terms and a lower interest rate.

You Have Equity in the Vehicle

Your vehicle depreciates as it ages and you put miles on the engine. But some cars reach a point where they have positive equity, which is where you owe less on your vehicle than it’s worth.

Refinancing your vehicle when you have positive equity could put money in your pocket. This is because a lender might be willing to loan you more for your new loan than it would cost to pay off your previous loan. This is known as cash-out refinancing. Check sites such as Kelley Blue Book to determine how much your vehicle is worth and divide that figure by what you owe on the car to see whether you have positive equity. If you do, it could be a good time to refinance.

You Can Get a Better Interest Rate

Consumer interest rates can fluctuate, and you may be paying a higher interest rate on your auto loan than the current interest rate. If this is the case, you might qualify for a new loan at a lower interest rate if you refinance. You may even be able to refinance with the same lender. The interest you pay on the amount you borrow impacts your monthly payment significantly.

A lower interest rate means a lower monthly car payment and less interest to pay on the entire loan amount. This could mean hundreds or thousands of dollars in savings.

You Want a New Lender

It’s possible that you just can’t stand your lender. Perhaps they provide horrible customer service, or maybe they changed something in their system that drives you crazy. Regardless of why, cutting ties with a company is a common reason people refinance their car loans. Research a company thoroughly before switching lenders to confirm the new one can provide the services you want and need.

You Financed through a Dealership

In-house dealership financing can be convenient and easy to obtain. Unfortunately, because dealerships like to make money, the loans they arrange for you are unlikely to work in your best interest. If you went through a dealership for your auto loan, you might be looking to refinance as soon as possible.

You’ll probably find a loan with better terms and interest rates if you go through a bank or credit union. To profit from the arrangement, the Center for Responsible Lending reports that dealerships usually mark up the interest rates lenders offer, so you should be able to get a lower rate simply by using a lending institution instead of a dealership.

You Need Different Terms

Loan terms vary from one borrower to the next, and how long you take to pay off your loan affects your monthly payment. You could lower your monthly payment by extending the loan term. For instance, if your original loan was for a five-year term and you’ve made payments on it for two years, you still have three years left. You could refinance the loan and get another five-year term, which essentially adds another two years to the length of time it will take to repay it in full.

While this can lower your monthly payment, extending your loan term will add to the overall amount you pay in interest. Crunch the numbers and ensure that the lower monthly payment outweighs the extra cost in interest before you refinance to get a longer loan term.

When Should You Avoid Refinancing a Car Loan?

Refinancing your car loan isn’t always in your best interest. You might want to avoid refinancing your car loan in the following circumstances:

You Have Negative Equity

Refinancing isn’t your best option if you owe more on your car than its market value. In fact, a lender could deny your application if you’re upside down on your car loan. Lenders will see you as more of a risk, as they’d have difficulty recouping their losses if you were to default on the loan. Even if a lender does approve you for refinancing, it’s unlikely to offer you better terms on a loan with negative equity.

You’ll Have to Pay a Penalty

Some lenders charge a prepayment penalty if you pay your existing loan off before the term ends. This fee is typically around 2% of the remaining loan balance. Check if your lender charges a fee and how much it will cost to pay your loan off early. If the fee is significant, it might not be worth the savings refinancing offers.

You Don’t Have Long to Pay Off the Loan

It might not be worth it to refinance a loan that doesn’t have long remaining. When you get a new loan, it comes with a new term. So if you have a year or less to pay off your car loan, getting a new loan that extends your payments for another two years or more doesn’t make sense.

By waiting out the rest of the term, you can eliminate a car payment altogether. This may be a better financial move than lowering your monthly payment by extending the time you have until you pay it off, which ultimately increases the amount of interest you pay.

You Just Bought the Car

You should usually wait at least six months to a year before refinancing a loan on a vehicle. Lenders want to see that you have a history of making timely payments each month. This demonstrates that you can pay the money back, so a lender is more likely to offer you a loan with good terms. It’s also unlikely that much has changed in your credit situation in less than six months, and you won’t qualify for better terms if you refinance too soon.

Your Car Is an Older Model

An older vehicle with a lot of miles likely isn’t worth refinancing because older models don’t qualify for the best interest rates or terms. Older cars are more risky to lenders, as they tend to have more mechanical issues and fewer safety features. This lowers their value and the amount a lender is willing to offer in financing — if they will finance at all. Most used cars will also attract a higher interest rate when you take out a loan, so purchasing a newer model might be a better option if you want a lower monthly payment.

How to Refinance Your Car Loan

If you think that refinancing your car loan is the right move, follow these steps:

Assess your situation: Check your credit score and access your credit report to help spot any issues that could hurt your chances of refinancing at a good rate. You should also determine your remaining loan amount and the car’s value.Get quotes: Get quotes from a variety of lenders. Make sure you get information about the loan amount, interest rate, term and monthly payment, and potential fees to pay. With more than one quote, you’ll know where you have room to negotiate.Compare rates: Compare the rates in the quotes you receive. Choose a few that look good and use them to negotiate loan terms with the lender you want to use.Choose a lender: Once you’ve narrowed your options to a few lenders, choose the one that offers the best deal. Make sure you choose a company with a good reputation that provides excellent customer service.Apply for the loan: Apply for the loan through the lender you want to use. Most lenders will allow you to start your application online, but you may need to finalize the refinancing process in person or on the phone. Expect to provide information about your existing loan, vehicle, income, other debts, and car insurance. The lender will also look at documents such as pay stubs.Pay off your previous loan: The last step before you start making payments on your new loan is to pay off your old loan. Your refinance company should pay off your loan, but you may need to sign some paperwork. Then, check to make sure everything is processed and taken care of.

A new loan could save you money on your monthly car payment. Use this guide to determine whether it’s the right time to refinance your vehicle loan so you can reduce your monthly expenses.

Hearst Autos Research, produced independently of the Car and Driver editorial staff, provides articles about cars and the automotive industry to help readers make informed purchasing choices.

Finance & Insurance Editor

Ashley Donohoe has written professionally about business and finance since 2010 and has served as an expert reviewer since 2017. Her work has appeared on major websites such as Money.com, The Balance, and the Miami Herald. Having run her own business, she has broad expertise in taxation, financial management, accounting, and investments. Her educational background includes a B.S. in Multidisciplinary Studies, Master of Business Administration, and certifications in accounting and taxation.