When to refinance your car loan and when to wait


Refinancing your car loan involves exchanging your current loan for a new one with different terms. But maybe you’re wondering if now is a good time to refinance or if you should wait. Before making a decision, you will need to review the lender’s requirements and determine if they charge prepayment penalties. It’s equally important to consider the time remaining on the loan term, your credit score, and your overall financial health.

4 reasons to refinance a car loan

If you refinance your car loan, you’ll likely lower your monthly payment and could save on interest. Keep these factors in mind when deciding if it’s right for your financial situation.

1. You need to change your monthly payment

If your income has recently dropped or you want to free up funds to meet other financial goals, it might be time to refinance your car loan to get a lower monthly payment, even if you get the same interest rate. But if you get the same interest rate, you’ll have to take a longer term to lower your payment, which means you’ll pay more interest over the life of your loan.

2. Your credit score has increased

The best interest rates on car loans are usually reserved for buyers with good or excellent credit – usually a score of 670 or higher. If your credit score has improved since you got your current loan, you may qualify for a new loan on better terms.

3. You financed through a dealership

Dealer financing usually does not come with the best possible interest rates. When you finance internally, the dealership stores your information with lenders in its network. Some lenders pay higher commissions than others, so the dealer can put you in touch with a lender who pays better, even if a better rate is offered.

4. Interest rates have fallen

Interest rates on auto loans vary based on the prime rate and market conditions. If it’s been a while since you last took out your current loan, average car loan rates may be lower.

When to delay refinancing

Even though you may get a lower monthly payment or interest rate, there are situations when it might make sense to put refinancing on hold. For starters, if your current lender charges prepayment penalties for prepaying your loan, refinancing could be costly.

You should also avoid refinancing your car loan if you are nearing the end of your loan term. It’s possible to refinance and get a low monthly payment, but you’ll likely pay more interest. This is because the lender will likely extend the remaining balance for an extended period.

Some lenders may deny you financing if your car is older or has more than 100,000 miles. Your application for financing could also be refused if you are upside down on your car loan or behind on your loan repayments.

How to refinance your car loan

Once you have found and prequalified with a lender for refinance your car loan, contact us before making a full application to determine the information and documents needed to process your loan application. Most lenders will ask for a copy of your driver’s license, utility bill, and proof of income. You will also need to provide proof of insurance along with the make, model, VIN (Vehicle Identification Number) and mileage of your vehicle.

When you’re ready to apply, the process should be seamless, as you won’t be rushing to gather documents. You can usually apply online with most lenders or visit a branch if you’re looking for a loan from a bank or credit union. Once you submit your application, the lender will review it and perform a credit check to determine if you qualify for a loan and what interest rate you will receive.

The bottom line

Refinancing your car loan could be a smart financial decision if your situation has changed since you took out your current loan. But before getting a new loan, use an auto refinance calculator to determine if the benefits outweigh the costs. Too, explore potential rates to assess whether you might be eligible for a loan with more competitive terms.


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