When to Refinance a Car (and When to Wait)

If you’re not happy with your car loan, you may wonder, when is the best time to refinance a car? Refinancing a car loan may save you money overall and help you pay off your loan faster. It’s generally best to refinance your car loan when market rates are low and you can qualify for lower monthly payments or better terms.

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When you should refinance your car loan

The best time to refinance a car loan can depend on whether your credit score has improved since you took out the original car loan, whether you’ve built equity and whether car loan rates are low.

  Your credit score improved

Your credit score plays an important role in car financing, as auto lenders sort applications by credit tiers. The annual percentage rate (APR) you receive, as well as whether you even receive an offer at all, are both largely determined by your credit score.

If you’ve improved your credit score since you purchased the vehicle, you may qualify for a better financing deal. Securing a better APR could save you quite a bit in interest over the life of your loan.

For example, refinancing $15,000 from a 7% rate to 5% with a three-year term would save you around $1,500 in interest.

Here’s how much you would pay in interest over the life of a 5-year loan if you borrowed $25,000.

Lifetime Interest Charges on a $25,000 Loan

Source: Experian’s State of the Automotive Finance Market Q1 2023

  You want to change the loan term

It also makes sense to refinance your car loan if your financial situation has changed. Perhaps you lost your job and need a lower monthly payment or you got a raise and can pay your loan off sooner.

You could extend the length of the loan — known as the loan term — on your car refinance to get a lower payment. Still, it’s important to note that while a longer term reduces your payment, it will increase the amount of interest you’ll pay over time.

It works the other way, too: When you reduce the term, your monthly payment will increase while the amount of interest you pay overall will fall. For example, if you’re paying $300 a month on a $15,000 auto loan with 8.5% APR and you shorten it from 72 months to 48 months, you’ll save more than $3,800 in total interest charges.

  Loan rates are low

If auto loan rates have dropped since you took out the auto loan, you may qualify for a better APR. A small change in rates can save you money on interest, even if your credit score hasn’t changed much since you took out your original loan. To keep up with trends in the industry, LendingTree tracks auto loan statistics like average car payments and rate changes.

  You have positive equity

You may receive a better auto refinance rate if your car is worth more than what you owe on it, which is known as having positive equity. To understand your loan-to-value ratio, contact your current lender, find out how much you owe and then divide it by your car’s value.

You can determine your car’s value by referencing industry guides like Kelley Blue Book and checking what dealerships and private sellers are charging for your vehicle.

  You want a new lender

Some people choose to refinance simply because they don’t like the way their current lender does business. Bad customer service or poor record keeping can really sour a relationship with a lender.

If you’re unhappy with your current lender, refinancing with a new one may help alleviate some of your frustrations. LendingTree’s marketplace helps you compare lenders while you shop around to refinance a car loan.

When you shouldn’t refinance your car loan

Here are a few situations when it would be unwise to consider refinancing your auto loan.

 You have a bad credit score

If your credit score has gone down since you bought your car, it may not be a good idea to refinance your vehicle. If you work to improve your credit score, you may qualify for a better interest rate and have a better chance of qualifying with a lender. If you need to refinance quickly, you may consider using a car loan cosigner instead.

However, there are lenders that will refinance a car loan with bad credit. Before signing on the dotted line, be sure that the refinance loan makes financial sense and won’t end up costing you more in the long run.

 You have an older car

If your car is 10 years or older, you may have difficulties finding a lender willing to refinance your loan. Many lenders set limits on how old a vehicle can be in order to qualify for the loan.

If you need to refinance your older car, consider taking out a personal loan or trading in your car instead. Personal loan lenders are typically flexible in how you use the funds, while trading in your older vehicle can help you access a new car with better financing options.

 You’re upside down on your loan

If you owe more on your car loan than your vehicle is worth, you have negative equity, also known as being upside down. Finding a lender to refinance an upside-down car loan isn’t easy, and the interest rate is likely to be much higher than average, increasing your total cost of borrowing.

One way around this issue is to pay the difference in cash so you’re no longer upside down and can refinance at a lower rate.

 You bought the car less than 6 months ago

While you could refinance your car almost immediately after purchase, it’s best to wait at least six months to a year to give your credit score time to recover, build up a payment history and catch up on any depreciation that occurred when you purchased. Unless there are other reasons to refinance, it’s unlikely you’ll get a lower rate than what you currently have.

It’s important to be sure you can afford a new car before making your initial purchase. If you have any doubt about your ability to make your auto loan payments, you’re better off not making the purchase and looking for an alternative option.

 You’re about to pay off your car loan

If you’re close to paying off your car loan, it may not be wise to refinance. This is because most auto loans employ a simple interest model, meaning you pay off the interest first.

As you near the end of your loan term, most of your payment is going toward the principal of the loan, not the interest. Refinancing could mean that you’ll end up paying much more in interest over the life of the loan.

 Your loan has prepayment penalties

Some auto lenders charge penalties for paying off the loan early, though most do not. Prepayment penalties are fees some lenders charge to recoup the loss of profit they make on interest when you repay your loan before the term is over. If your current auto loan comes with a prepayment penalty (usually noted in the fine print), you’ll want to do some math to determine if refinancing is a good deal after you pay the penalties.

Is refinancing worth it?

If you know you’ll get a better rate and can save yourself some money, refinancing your car loan may be a no-brainer. Use an auto refinance calculator to estimate your savings and decide if it makes good financial sense to refinance.

In many cases, people refinance because they need to lower their monthly payment, often due to unforeseen financial challenges. Finding a balance between your immediate financial needs and long-term financial goals is never easy — but if you do the math and plan accordingly, you can make the right financial decision for you and your family.

How to refinance a car loan

Here’s what you need to know about how to refinance your loan and the steps you’ll need to take ahead of time to prepare.

• Estimate what you can afford. Before you apply for a loan, examine your budget to determine what you can afford to pay each month. Figure out whether refinancing makes sense for you.
• Gather your documentation. You’ll need to provide documentation to verify your identity and income — such as your driver’s license, Social Security number and pay stubs or bank statements. You’ll also need to provide your vehicle identification number (VIN) and information on your current lender — including your account number and how much you have left on your loan.
• Compare lender rates. When you’re shopping around, don’t feel obligated to go with the first offer you get. Instead, get preapproved for a car loan with multiple lenders and compare the APR, term, payment amount, fees and penalties from each lender to find the best offer. After you’ve decided on a lender, you’ll submit a formal loan application.
• Close on your loan. When you sign your loan agreement, be sure to — once again — read the fine print. After you’ve closed on your loan, you’ll likely make your first payment in the next 30 days.