When Should You Refinance Your Car Loan?

When Can You Refinance?

Your car loan is not a death sentence. If you borrow money to buy a car, you should ensure you're not paying more than you have to. You could save money by refinancing into a better loan, and it's essential to understand how the process works.

When Is It Possible to Refinance?

Refinancing is possible as soon as you buy, even before making your first monthly payment. You are not required to wait a set period before refinancing your car loan. It would be best if you met all of the requirements for the new loan to refinance. Make sure you get a better deal and that refinancing doesn't cause you to pay more for your vehicle.

Important:

You may be unable to refinance in some cases unless you have documentation from your state's Division of Motor Vehicles (DMV). Gathering registration information may take some time.

What You'll Need for a Refinance

You will need the following items to refinance an existing loan:

A new loan offers better terms or pricing than your current auto loan.
Details about your current loan, such as your current lender, account number, and loan balance
Details about your vehicle, such as the make, model, year, and VIN
Pay stubs or tax returns that demonstrate your ability to repay

The Best Reason to Refinance: Lower Interest Rates A primary reason for refinancing a loan is the ability to borrow at a lower interest rate. That lower rate (assuming all other factors remain constant) means you pay less for your car after deducting all your borrowing costs. Your required payment should also decrease because the interest rate is included in your monthly payment calculation. As a result, managing your monthly cash flow is simplified. Refinance as soon as possible when you can replace your existing loan with a lower rate. Most auto loans are amortizing, meaning you pay a fixed monthly payment plus interest costs. You pay down your debt over time, but you pay most of your interest costs at the start of the loan, so get that rate down sooner rather than later to start saving money. An amortization calculator will show you how much money you can save by refinancing.

Reduced Monthly Payments?

Lower monthly payments can result from refinancing, but this is not always good. You may save money if you achieve lower payments due to a lower interest rate (as long as you refinance near the beginning of your loan period). However, if you wait several years before refinancing, the interest cycle and amortization process described above is restarted, and you continue to pay interest for several years. Despite the lower monthly payments, this can end up costing more. If your credit score has improved since your initial loan, you may be able to get a better loan. You may be able to qualify for a lower interest rate, lock in a low fixed rate, or even remove a cosigner from the loan. When you make on-time loan payments, your credit score improves (or when negative items fall off your credit reports after seven years or more) Those successful payments can raise your credit scores to increase your borrowing options. Even one year is enough time to see progress, so it's worth checking to see if your credit scores have improved enough to qualify you for a better loan.

Avoidable Errors

While refinancing may be appealing, it is easy to spend more money than necessary. Avoid the most common pitfalls, especially if your car loan is only a few years old.

Making it Longer

A longer-term loan usually means paying more for your vehicle. It may be tempting to switch from a 48-month loan to a 72-month loan, but longer loans typically have higher interest rates. Longer terms result in lower payments, which can provide significant relief when cash flow is constrained. However, the overall cost of a long-term loan is higher (which seems counterintuitive given the lower payment). An amortization table, once again, can show you how your interest costs accumulate over time.

Going Inverted

Extending the life of your loan can also result in an upside-down loan. In other words, you might owe more on your car than it is worth. To get rid of the car, you'd have to write a check to your lender or continue making payments on a vehicle you no longer use. You must continue making payments (to avoid credit damage) even if your car breaks down and becomes inoperable. Paying off loans quickly allows you to easily sell (and possibly buy a different, less expensive car) if the need arises.

Penalties for Early Payment

Prepayment penalties still exist, and you may be required to pay extra if you pay off a loan before the term expires. Check if paying off your existing loan early will cost you anything extra. Penalties can wipe out any savings from a lower interest rate.

You've Been Waiting Too Long to Refinance

Waiting can cost you money if you run the numbers and determine that refinancing makes sense. Rates are typically lowest on new vehicles, and some lenders will not refinance loans for vehicles that are more than a certain age (seven years, for example). If you refinance immediately after purchasing from a dealer and taking advantage of dealer incentives, you might even get a "new car" rate. Rates on used cars are typically higher than rates on new cars.

Payments Not Received

Maintain your involvement throughout the refinancing process, and don't assume anything is finished. You may believe that your current loan has been paid off and that you can stop sending payments, but any delay in the process can result in a "missed" payment. Late payments will harm your credit and ability to refinance.

Important:

Before you stop making payments, confirm with both lenders.

How to Refinance a Home

You must apply with a new lender to obtain a new loan. In most cases, the process is relatively painless—your lenders will handle the logistics, and all you have to do is apply.

To get ready:

Gather relevant information about your current loan. The most recent statement from your lender should contain the necessary information.
Obtain information about your vehicle (if you will not be driving it). Your VIN, make, model and year of manufacture are all useful to have on hand.
Prepare income documentation so lenders can verify your ability to repay your new loan. Several recent paystubs should suffice but check with your new lender for more information.
Submit your application, any required documentation, and any lender questions. Many lenders will give you an approval decision the same day you apply or within a few days.

Where Can I Refinance?

Any lender offering competitive rates and fees is worth investigating. A local bank or small credit union is an excellent choice for many borrowers. These institutions typically offer low-interest rates and are more flexible regarding loan size and credit issues. Another good source is online lenders. You can take care of everything whenever and wherever it is most convenient, and you can also find great deals online.

Tip:

Get quotes from at least three lenders and complete all of your research within a few weeks. When lenders run credit checks on you, your credit score drops slightly. 7 Multiple inquiries become an issue over time, but you are not penalized for shopping rates—submit all of your applications within 14 to 30 days.

Frequently Asked Questions (FAQs)

Is it possible to refinance a car loan with bad credit?

You may be able to refinance a car loan with bad credit, but refinancing may not be beneficial if your credit is worse now than when you took out the original loan. If your credit score has dropped, a lender will unlikely offer you better terms on a refinance.

How many times can a car loan be refinanced?

You can refinance your car loan as often as you find a lender willing to do so. However, lenders may view multiple refinances in a short period as a red flag.