When Should You Refinance Your Car Loan?

Many Americans today take out an auto loan when buying a new or used vehicle rather than paying in full upfront. In 2023, 79.7% did when buying new but only 38.4% did when buying used, according to Statista. These auto loan repayment terms vary from 18 months to as long as 96 months, depending on the lender, meaning that you could spend eight years paying off your vehicle.

At some point, you may decide that the terms you agreed to previously are no longer right for you. In that case, refinancing your auto loan could be an option. Let’s explore when you should refinance your car loan and why.

Refinancing your car loan: Pros and cons

Why you should refinance your auto loan

There are many potential benefits to refinancing an auto loan, especially if you have multiple years left on your repayment. Here are some of the top reasons to consider refinancing.

To save money in interest

One of the biggest benefits of refinancing your car loan is to lock in a lower interest rate. You may be able to lock in a lower rate if one or more of the following apply:

• Market interest rates have dropped since you bought your vehicle.
• Your credit score has increased.
• You’ve established a stronger credit history.
• You plan to choose a shorter repayment term.
• You plan to add a creditworthy cosigner to the new loan.

Even reducing your interest rate by half a percentage point could save you hundreds (if not thousands) of dollars on your vehicle.

To reduce your monthly loan payment

Refinancing may enable you to reduce your monthly payment. You can still choose to increase your payment in the future or make extra payments when you can. A smaller monthly payment is possible if you refinance into a loan that has:

• A lower interest rate.
• A longer loan term.
• A combination of the two.

To remove (or add) a cosigner

Perhaps you bought your vehicle with the help of a parent and now want to free them of their obligation to your debt as your cosigner. Or perhaps you hope to add your creditworthy spouse to your loan in order to reduce your interest rate.

In most cases, the only way to release an existing cosigner or add a new one is to refinance the loan. By refinancing with the same lender or a new one, you can build a new loan with different, hopefully better loan terms while also adding or releasing cosigners as desired.

Why you shouldn’t refinance your auto loan

Of course, refinancing your car loan isn’t always the best decision. Here are some reasons you might not want to do it.

You could pay more (or for longer)

Refinancing a loan allows you to adjust your interest rate, repayment term, or both. This can cause problems.

You may need to lower your monthly payment, which could extend your loan repayment term. If you go this route, you’ll be making car payments for longer and may pay more in interest in the long term.

Furthermore, if interest rates have risen since you first bought your vehicle, you may be unable to snag an interest rate as low as (or lower than) your current rate. Refinancing could result in you paying more interest over the life of the remaining balance.

Either of the above two scenarios could end up with you paying more for your car in the end than with your previous loan.

One other cost to consider is that some lenders may charge origination fees or retitling fees when refinancing. For example, refinance lender Caribou charges a processing fee of $399 to $499 for transferring your vehicle’s title from the original lender once the new loan is finalized.

Not everyone will qualify

Just because you already have an auto loan doesn’t necessarily mean you’ll qualify for a new refinanced loan. You may find it difficult to get approved if you don’t meet the lender’s credit score, income, or debt-to-income ratio (DTI) requirements. This is especially true if you hope to remove an existing cosigner and qualify for the new loan on your own.

Not available for all auto loans

Even if you personally qualify for a refinance, your car may not. Some lenders, such as those in the RateGenius network, may cap refinance loans at a certain age or mileage. You may also find it difficult to get a car refinanced if it has a salvage title, you haven’t held the existing loan for long enough, or you owe notably more on the vehicle than it’s worth.

How much money can you really save by refinancing?

How much will refinancing actually save you in the end? The answer will depend on a number of factors, such as the interest rate you’re offered, how much you still owe on your vehicle, and how long it takes you to repay your new refi loan. Done correctly, though, refinancing can save you hundreds or even thousands of dollars over the course of your loan.

For example, let’s say you still owe $24,000 on your vehicle. You currently have a $465 monthly payment at an 8.75% APR, with 65 months remaining on your loan. You refinance that balance into a new 60-month loan with a 7.49% APR. while your new loan would actually increase your monthly payment by $16, you’d pay off your car five months earlier and save $1,372 in the process.

How to calculate your auto loan refinance

We used Bank of America’s online auto refinance calculator to determine the above figures. It compares your existing loan with your new loan and tells you whether or not a refinance is beneficial. It’s not the only one.

To calculate your auto loan refinance and determine how much time, month, or both you’ll save, you’ll need the following information:

• Existing loan balance.
• Months remaining on your loan.
• Current interest rate.
• The monthly payment amount.

You should also know the parameters you want (interest rate, repayment length, etc.) for your potential new loan, so you can adequately compare the two.

When is a good time to refinance your auto loan?

While you can refinance an auto loan at almost any time, there are a few situations in which a refinance might make even more sense.

• While you still have a decent balance remaining. The higher your car loan balance, the more money you can potentially save if you refinance into a new, lower-interest loan. While you can still refinance later on, you’ll miss out on a lot of the benefits.
• When your credit score improves. If your credit score has improved, refinancing could be a wise decision. With an improved score, you could snag better loan terms, including a lower interest rate.
• If market interest rates have dropped. You can save on interest by refinancing during a lower interest rate environment.
• Before your vehicle is too old. Many lenders have specific criteria for vehicle age and mileage. If you wait too long, you may be ineligible to refinance.

Will your credit score be affected by applying for an auto loan?

Anytime you apply for a car loan, lenders will initiate a hard pull of your credit. According to the credit reporting bureau Equifax, this generally will affect your credit score for one year, though it will stay on your credit report for two years.

Additionally, according to myFICO, your credit score is based partly on new credit (10%) and your average age of accounts (15%). When you close one account to open a brand new one, your average age of accounts will decrease, while your new credit will increase. Both could negatively affect your score.

How to refinance a car loan

Suppose you’ve decided that a refinance makes sense for you. Here are the steps you need to follow.

Step 1: Gather your existing loan info

Before you can begin shopping for a refinanced loan, it’s important to know where your vehicle loan currently stands. You’ll need your existing loan information, including an up-to-date balance. You should also know your vehicle’s current mileage and its year, make, model, trim, and any special features.

Step 2: Start shopping for refinance lenders

Even if you’re not ready to apply just yet, you can start looking for potential lenders. Not all auto lenders offer refinancing, and not all who do may be suitable for you.

For example, you’ll want to make sure that your vehicle meets the requirements for age, mileage, and loan-to-value (LTV) ratio, or you won’t get approved. If the lender publishes its borrower criteria—such as a minimum credit score requirement, income limit, or debt-to-income (DTI) ratio threshold—be sure that you meet those before you apply.

Step 3: Search for the best rates

Once you have a list of potential lenders, start comparing interest rates. Most lenders will publish a range of refinance rates currently being offered; while you won’t know exactly what rate you’ll get, it can give you a good idea of what to expect and which lenders may be the best bet.

Step 4: Begin applying for new loans

Now it’s time to start applying with one or more lenders.

Some refinance lenders offer loan preapproval, which allows you to get conditionally approved for a loan and even see the rates and terms for which you may qualify without a hard credit inquiry. Other lenders require you to submit a full application, which mandates a hard credit pull.

However, as long as you apply for all loans within a certain “rate shopping” window (either 14 or 45 days, depending on the credit scoring model), all of those inquiries will count against your credit as one single inquiry, minimizing the impact on your credit score.

Step 5: Choose the loan that’s right for you

Once you have loan offers in hand, it’s time to pick the one that makes the most sense for you and your situation. What is your biggest priority: a lower monthly payment, the lowest possible interest rate, removing a cosigner, or a combination thereof?

Choose the lender that will approve your loan and proceed with your application. Then, select the exact loan terms you want from the options offered, selecting your preferred interest rate, repayment term, and monthly payment amount.

Step 6: Provide the lender with any necessary information

To move forward, the lender will need some important personal information from you, as well as info about your vehicle and existing lender. You may already have provided some of this information in the application process.

This info may include:

• Name.
• Address.
• Birthdate.
• Social Security number.
• Contact information (email and phone number).
• Existing lender info.
• Current loan number.
• Your car’s vehicle identification number (VIN).
• Current payoff amount.
• Proof of identity.
• Employment or income verification.

Step 7: Sign your promissory note

The last step in finalizing your new loan is to sign your promissory note, which is essentially a contractual guarantee to repay the debt as promised. Most lenders will allow you to sign this digitally, so it may only take a few minutes online.

Step 8: Continue paying your original loan as scheduled

Even if your new loan is finalized, it’s important that you continue paying your original loan according to the due date scheduled. This is because it can take a few days for the new lender to send funds to your old lender and actually close out the existing loan balance.

If you skip a payment, you risk a negative credit report, so even though your new loan will replace your old one, be sure to make any upcoming payments you may have due.

TIME Stamp: Refinancing your car loan can save you money, but you must be careful about how you do it

When you refinance an auto loan, you replace your existing loan with an entirely new loan that may offer you a lower interest rate, better repayment terms, and the ability to add or remove a cosigner. With this new loan, you may be able to save money on interest, get out of debt sooner, or both. Qualifying for a loan refinance will depend on your personal credit history and the details of your vehicle and current loan.

Frequently asked questions (FAQs)

How long should you wait to refinance a car?

While you can refinance a car loan at any time, you may want to wait until you’ve held (and paid toward) your loan for at least three to six months. This ensures that your new loan and initial on-time payments have time to be reported on your credit.

Does refinancing a car hurt your credit?

Your credit score may be affected if you refinance your car loan. New credit inquiries can ding your score for a year, and will remain on your credit report for two years. Opening a new loan and closing an existing one can also affect your average age of accounts and percentage of new credit, both of which can lower your score.

Should you wait a year to refinance your car?

It’s generally recommended that you wait at least three months before refinancing your car to ensure that your loan is reported to your credit history and that your initial payment(s) are recorded as being made on time. You also choose to wait longer to refinance, though waiting too long may cause problems, as it’s harder to refinance a loan that is close to being paid off.

What is the disadvantage of refinancing a car loan?

There are a few potential downsides to refinancing a car loan, one of which is the initial impact to your credit score. Depending on your credit and market rates, you may also find that a new loan may not have as low of an interest rate as your current loan, or you might not be able to get the loan terms you want. Also, not all vehicles or borrowers will qualify for a refinance loan.