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Have you recently bought a car and found yourself less than satisfied with your auto loan? Maybe your monthly payment is stretching your budget, your lender’s customer service isn’t up to par or you’ve seen lower rates advertised by competitors. Whatever the case may be, refinancing might give you an out.
But how soon can you make the switch?
While some lenders are willing to approve a refinance as soon as your car’s title transfer is finalized, getting an offer that’s actually worth it may require a little patience. Here’s what to consider as you decide when you can refinance your car.
Refinancing your car too early or too late can negatively impact your application process or potential savings. Read on to learn why.
If you’re eager to refinance your car loan but are still within the first 90 days of your loan contract, you may encounter a few obstacles, such as:
Once at least six months have passed, borrowers are generally in a better position to refinance auto loans. Half a year should be plenty of time to get the title transferred over and get your credit back in shape. You may still run into the occasional lender who wants up to 12 months of on-time payments before you can qualify but that will likely be the exception rather than the rule.
Most lenders will let you refinance at any time, but your potential savings decreases as your loan begins to wind down. Auto loans typically follow a simple interest model where you pay more interest upfront and less at the end. So, as you get to the point where you only have a year or two left on your loan, refinancing is less likely to save you money. However, you can always run the numbers to find out for sure.
Looking beyond timeframes, refinancing an auto loan is more likely to be beneficial in the following four circumstances.
If your credit score has improved since getting your current auto loan, you’re more likely to qualify for a lower interest rate which could help you save on your monthly payment and overall costs. For example, the average interest rate on a used car loan is 21.55% for a borrower with a 500 credit score, according to Experian. However, it drops to just 7.13% for a borrower with an 800 credit score.
When looking at a $30,000, five-year auto refinance loan, a borrower with a 21.55% rate would pay $225 more per month and $13,503 more overall than a borrower with a rate of 7.13%. While your credit score changes likely won’t be that drastic, even smaller changes can have notable impacts on your costs.
Refinancing can also be beneficial when interest rates drop in the market. For example, when the Federal Open Market Committee (FOMC) cuts the federal funds rate, the interest rates on car loans and all other financial products tend to follow. As a result, if benchmark rates have come down since you got your loan, you may be able to land a lower rate, even if your credit scores haven’t changed.
If you find yourself in a situation where you need to lower your car payment, such as if you lose your job, auto loan refinancing may be able to help. If you qualify for a lower interest rate, you may be able to get a lower monthly payment without extending your loan term and increasing your overall costs. However, even if you can’t, refinancing into a longer term may be worth it in some cases — such as if the alternative is defaulting on your loan.
If your car is worth more than you owe, you’ll be in a better position to refinance it. To find out where you stand, look up the fair market value of your vehicle. You can get a customized quote online from companies like Kelly Blue Book, CarMax and Carvana.
Once you have a quote, divide the outstanding balance on your loan by your vehicle’s fair market value to get your loan-to-value (LTV) ratio. If your LTV ratio is over 100%, you have negative equity which can cause some lenders to deny your loan application. Maximum LTV limits vary by lender but often range from 100% to 150%.
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Does refinancing your auto loan now sound like the right step for you? If so, here’s how to start the process.
If you find a new loan that can beat your current loan, it can make sense to refinance. However, consider the whole picture, including the monthly payment amounts, term lengths, fees, customer service ratings and overall costs.
Here are some frequently asked questions about when you can refinance your auto loan.
You can refinance a car loan as soon as the title is transferred into your name and you get approved by a new lender. Whether it’s worth it or not will depend on if you can find a better deal. You may need to wait a few months for your credit scores to recover after getting the first loan.
Refinancing your car makes sense when you can reduce your overall borrowing costs, lower your monthly payment amount or both. You’re more likely to get a better deal on a new loan if your credit scores have improved or interest rates have dropped since you got the first loan.
Your credit score may see a temporary decrease due to your lender’s hard credit inquiry during your application process. If you’re only shopping around for a refinance, many lenders let you prequalify without a hard credit inquiry.
Vehicle requirements vary by lender, so you’ll want to check with the lenders you’re considering. For example, Bank of America won’t finance cars if they are over 10 years old or have 125,000 or more miles. On the other hand, USAA doesn’t have any specific age or mileage requirements. While you can refinance a car loan that is close to being paid off, it may not yield significant savings.
Yes, a cash-out auto refinance loan allows you to refinance a car for more than you owe and receive the difference in cash. While not as widespread as standard auto refinance loans, you can find them from a few lenders, such as AutoPay and Visions Federal Credit Union.
Looking to refinance your car loan but just got the vehicle? Learn how soon you can refinance your car loan after purchase and other factors to consider.
