Best Time to Refinance a Car Loan

The best time to refinance a car loan is when interest rates are low so that you can save money on a new loan compared to your original loan. The best time is when you can lower your monthly payments, reduce the total interest you pay, or both. Generally, you'll want to refinance until you have had your loan for about a year, but not toward the very end of paying it off, to get the maximum benefit.

Key Takeaways

  • The best time to refinance a car loan is when you can secure a lower interest rate, a lower monthly payment, or both.
  • You likely won't be able to refinance your car loan until the loan is six months to a year old.
  • Refinancing when the car is almost paid off likely won't provide any benefits, and you may pay more in interest.
  • Refinancing your car loan within the first two years of the loan could result in a lower monthly payment.

When Is the Best Time to Refinance a Car Loan?

The best time to refinance a car loan is when you can get a lower interest rate to save money, or change the terms of the loan so you will have a lower monthly payment, which can help your budget. Exactly when you can get a lower interest rate or a lower monthly payment on your car loan depends on a number of factors, like the broader interest rate environment and whether you have positive equity in the loan.

You'll want to take into account how long you’ve had the car loan. If you try to refinance your car loan too early or too late, you won't get the maximum benefits from refinancing. Let's look in more detail at how refinancing a car loan works with various timeframes.

Refinancing During the First 60 to 90 Days of the Car Loan

You might find it hard to refinance a car loan in the first few months of your current car loan. First, some lenders may not be willing to offer a new loan until you have an established payment history that indicates you will likely pay off the loan.

Second, when you apply for a car loan, the lender will run a hard inquiry on your credit report to verify that you are a responsible borrower. This hard inquiry can temporarily lower your credit score, perhaps for several months. If you apply soon after opening a car loan and you have a lower credit score as a result, you may not qualify for better terms.

A new lender that refinances your current car loan will need the title to be transferred to them as the new lien holder. However, it can take up to 90 days before a copy of your car title is sent to you by your state's DMV after originally purchasing and financing a new vehicle in most states. So, if you try to refinance too soon, before you receive a copy of the title or before your original lender receives the title from your state, your new lender may not be able to get access to the title in a timely manner. This could deter a new lender from refinancing the loan. 

Refinancing Six Months Into the Loan

In many cases, waiting six months could be a more opportune time to refinance your car loan because it provides time for your credit score to rebound and for your lender to receive the car title.

However, six months may not be long enough to see such benefits as a lower interest rate that could result in savings, depending on broader market trends. When you can get a lower interest rate, you will save money in the long-term. Refinancing at the same interest rate may not always make financial sense.

Refinancing With Two Years or More Remaining on the Loan 

After you have had your loan for at least a year but before you have only a year remaining may be ideal to refinance a car loan to get the maximum financial benefits. During this timeframe, enough time has passed for your credit score to potentially improve with your repayment history. You will likely still be paying enough in interest to make a lower interest payment worth getting refinancing.

When to Refinance a Car Loan

The best time to refinance a car loan can also depend on factors like your financial situation, your loan terms, the amount of equity in the loan you have, and broader market trends like Federal Reserve actions to lower the prime rate, on which most car loan interest rates are based. Let's look in more depth when refinancing would be a good option.

When Your Finances Have Improved 

If your credit score is higher than it was when you initially financed the car, you could potentially refinance to a loan with a lower interest rate. Lenders are more likely to offer better terms to borrowers with stronger credit histories because they view them as lower risk.

If your income has increased since you took out your auto loan, such as if you got a new job or a raise, it may be a good time to refinance. Lenders will see that you can afford to pay a bit more and perhaps view you as a less risky borrower, so they may offer you a better interest rate.

When Interest Rates Have Dropped 

If the interest rates on car loans have dropped since you originally financed your car loan, you could likely refinance at a lower rate, which can save you money. Even if your credit score is the same as when you secured your original car loan, you may be able to get a lower rate if the broader market trends are toward lower interest rates.

When You Have Positive Equity

When you buy a new car, the value of the car typically depreciates over time. If you are in a situation where you owe more on the loan than the car is worth, consider delaying refinancing until you have positive equity. With positive equity, lenders will be more likely to offer better terms because they can rely on the collateral in the event you fail to make payments. Essentially, having positive equity in your loan makes you a lower risk to lenders.

When to Delay Refinancing

In some cases, refinancing your car loan may not be in your best financial interest, such as if you will pay more in interest in the long-term. Here are some situations when it would be better not to refinance. 

When You Have Negative Equity

You can have negative equity in your car loan when your car's value depreciates and you owe more to the lender than the car is worth—known as being upside-down in the loan. In these cases, it is unlikely a lender will approve a new loan for better terms. Consider continuing to make payments on your original loan until you have positive equity before you refinance a car loan.

When You Have an Older Car

Many lenders will not refinance a car loan if the car is 10 years old or older. In fact, some lenders have a lower threshold, such as seven or eight years. Even if the car falls within the allowed age group for refinancing, some lenders may not refinance it if the car’s mileage is high, such as 100,000 miles or more. Sales and prices for older used cars, often with high mileage, have gone up dramatically in the past few years due to chip shortages and supply chain issues impeding the production and sales of new cars, however. This market force has eased the financing restrictions for older vehicles to some degree.

You’ll Have a Prepayment Penalty 

If your current car loan has a prepayment penalty, you may be better off paying the loan as agreed. For example, if the amount of the penalty is more than the overall savings you would reap with refinancing, skip the refinancing. You don’t want to pay even more than you owe already. 

Your Loan Term Is Almost Over

Car loans are structured so that you pay the majority of loan interest in the first years of the loan. Therefore, if you only have a year or so left on your loan, you’re likely making a majority of your car payment toward the loan principal. If you refinance at that time, you could end up paying even more interest on the loan with a new loan.

How to Refinance a Car Loan

Refinancing a car loan is a straightforward process similar to getting a new loan. Here are the main steps:

  1. Review your car loan documents so you know your original loan terms, including interest rate, loan length, and any prepayment penalty. 
  2. Shop around with a minimum of three lenders and compare rate quotes and terms to find the best offer.
  3. Fill out a loan application. 
  4. Pay off original car loan with the funds from the new loan, and start payments for new loan. 

Can I Refinance My Car Loan with Bad Credit?

Some lenders will work with borrowers with bad credit. If your credit score has declined since you first took out your car loan, you may find that lenders are not willing to offer you a better interest rates. If you finance with worse credit, you could end up paying more in interest in the long-term.

Does Refinancing Your Car Loan Hurt Your Credit?

When you refinance your car loan, the lender likely will check your credit with a hard inquiry. As a result, your credit score could decline temporarily. However, if refinancing helps you pay down the loan faster, your credit could benefit in the long-term.

How Soon Can I Refinance My Car Loan After the Purchase?

How soon you can refinance your car loan after a purchase will depend on several factors, including whether you have equity in your loan and your lender's requirements. Some lenders will allow you to refinance your car loan immediately after you purchase the car. Others have prepayment penalties. Generally, aim to wait at least six months before refinancing. 

The Bottom Line

The best time to refinance a car loan depends on a number of factors. Aim to find a time when refinancing benefits you, such as when you can get a lower interest rate or lower your monthly payment. Make sure to calculate the costs of your original loan and a new loan to see how much money you may save. Finally, compare car loan offers from several lenders to get the best interest rate.

Article Sources
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  6. Consumer Financial Protection Bureau. "What Things Can I Negotiate When Shopping for a Car or Auto Loan?"

  7. Consumer Financial Protection Bureau. "What Is Negative Equity in an Auto Loan?"

  8. Can I Finance an Older Car?

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