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If you are financing a new or used car, take a closer look at your current loan and monthly payments. Ask yourself: Can a get a better deal by refinancing to a new loan, preferably with a lower interest rate and better terms?
Even if the answer is yes, you’ll want to carefully consider pulling the trigger on a refi. That’s because the timing of your refinance can make a big difference.
Learn more by taking time to understand good and bad reasons to refinance your car loan, good candidates for a refi, the right time to pursue a refinance, and if and when refinancing is worth it.
Good reasons to refinance your car loan
The primary reason why borrowers with a car loan seek a refinance is to save money – pure and simple. This can be accomplished if and when you can secure a new loan with a lower interest rate than what you are currently paying and better loan terms.
“Many car dealerships will upsell or pad the loan terms when you are purchasing a car to increase their revenue,” says Ezra Peterson, a refinance expert and automotive industry professional in Fremont, California. “Particularly during the pandemic, when vehicle supply was very short, consumers lost a lot of their bargaining power and may not have had the opportunity to get the best deal they could have.”
Carter Seuthe, CEO of Credit Summit Debt Consolidation, agrees.
“One of the best reasons to refinance is if you first purchased a vehicle under less than favorable conditions. Maybe this is because you didn’t have the best credit score or interest rates were higher at the time,” he says.
If your credit score has improved since the time you took out your car loan, you may qualify for a better financing deal with a lower interest rate, assuming rates have decreased since that date.
It’s also smart to explore a refi if you are encountering financial difficulty repaying the loan. You may be able to lower your monthly payment.
Just be forewarned that if you refinance to a longer-term loan it could result in you paying more total interest over the loan’s life.
Good candidates for refinancing a car loan
The best borrower prospects for a car loan refi are those who qualify for a refinance loan at a lower interest rate.
“If you have a reliable income and a high credit score, you may be a good candidate for auto loan refinancing,” says Jake Hill, CEO of DebtHammer.
Truth is, almost anyone can be a worthy candidate for a refinance.
“Generally, better savings are seen by people who have owned their vehicle for at least six months and who may have had a thin credit file at the time of their vehicle purchase,” adds Peterson.
The best time to refinance your car loan
Being motivated to refinance is one thing. Capitalizing on the right window of time to do so is another. Because if you attempt to refi too late or too early, you won’t gain much from doing so.
“The timing for a refinance is important, especially due to the impact on your credit score,” Seuthe notes. “You will want to wait until your credit has recovered from the initial hit it took when you applied and were qualified for your current loan – approximately six months if not longer to be safe.”
He’s referring to the hard inquiry on your credit report that occurred when your current lender received your loan application. A hard inquiry can lower your credit score by 5 to 10 or more points. And the effect of a hard inquiry can impact your credit score for up to two years, although in many cases your score will rebound within a few months.
Furthermore, “you don’t want to time a refinance around the same time you are applying for another major loan such as a mortgage loan. This is due to the potential impact on your credit score and change in standing, which can impede the process of securing another loan,” cautions Seuthe.
Don’t refinance too soon
If you apply for a car refinance loan too soon after taking out your current loan, your credit score may not have had time to recover; a new hard inquiry triggered by a refinance request can further jeopardize your ability to score a lower interest rate and better loan terms.
Hill recommends waiting at least one year of the date you take out your original loan before refinancing.
“This gives your credit score time to rebound from the hard inquiry and other consequences of taking out the loan.”
Another benefit to waiting at least a year before refinancing? You’ll have more “skin in the game,” so to speak.
“If you have paid down a significant portion of your loan, you may have increased negotiating power and may qualify for better loan terms,” says Jason Williams, a certified public accountant. “Having built up equity in your car can be advantageous when refinancing.”
Additionally, note that it may take three months before a copy of your vehicle’s title is delivered to you by the DMV in your state after buying and financing your car. A refi loan lender will require that the title be transferred to them, as they will be the new lien holder.
Put another way, you’ll need to wait at least until you have the car’s title in hand before refinancing.
Don’t refinance too late or if other conditions apply
But you don’t want to wait too long to commit to a refi, either. It doesn’t make a lot of sense to refinance if your loan term is near the finish line.
Consider that you pay more toward interest earlier in the life of a car loan and more toward principal toward the end. If you refi too late, you may end up forking over even more in total interest over the two loans combined.
Many experts advise not pursuing a refinance unless you have a minimum of two years left on your existing loan.
It’s also bad timing to pursue a refi if your vehicle is “upside down” – meaning your car’s value has depreciated and you owe more than the automobile is worth. You may not even get approved for a new loan until you have positive equity in your car.
Lenders may also turn you down if your vehicle is a decade old or more or if the auto’s mileage exceeds 100,000 miles.
Lastly, you’ll want to avoid a refinance if your existing auto loan assesses a prepayment penalty. In this case, you’ll be charged a substantial fee for paying off your current loan earlier than agreed upon with a new refinance loan.
How to refinance your car loan
The process involved with refinancing is similar to what you did when you took out your current loan.
First, check over your current loan paperwork and documents and refresh yourself on the terms – particularly the interest rate, length of the loan, and any fees or penalties – so that you know what to shoot for.
Next, request rate quotes and loan offers from a variety of different lenders, and compare the rates, terms, and fine print carefully to narrow down the best deal. Complete the loan application, and await an underwriting decision.
“Be prepared that there may be additional documentation the lender needs, so gather access to your paystubs, income statements, and other documents ahead of time to streamline the process,” Peterson suggests.
Once approved, expect to sign legal paperwork to complete the loan and closing. Your new lender will pay off your old lender, and you will begin making payments on the new loan.