It’s not uncommon to take out a car loan only to discover you’re paying too much in interest, and there are better options out there. The good news is that you can switch your loan to a new lender (and possibly secure a lower interest rate) by refinancing1. The bad news? Some lenders have certain restrictions on the timing of your refinance.
If you’re asking, “When can I refinance my car loan?” We’ve got you covered. Here’s everything you’ll need to know about timing it right.
When can I refinance my car?
You can refinance your car as soon as your vehicle title transfers to your current lender, and you find a new lender with requirements that meet your situation. Some lenders will require you to wait at least six months into a loan term to refinance, while others have no set waiting period at all. It usually takes around two to three months for your car title to transfer from the manufacturer or the previous owner, so once this happens, you can look for lenders to refinance your car.
That said, just because you can apply for an auto loan refinance immediately doesn’t mean you should. For example, if your credit score dropped due to the hard credit check you incurred by applying for the loan originally, it may make sense to wait a few months for it to recover before you apply for a refinance. Or, if this is your first car, it may be beneficial to wait until you can show a history of on-time payments before you try to refinance. The best refinance rates are offered to creditworthy borrowers, so the better your payment history is, the better interest rate you’re likely to be offered.
The pros of refinancing your car
You can override predatory terms
Financing at a dealership usually happens through financial institutions such as banks and credit unions, as well as the financing arms of car manufacturers. But dealerships don’t always quote a lender’s lower rates. Sometimes, they’ll inflate them artificially to boost their own profits. Getting preapproved for a loan before you go into the dealership can keep this from happening, but if it’s already too late, and you think you got a bad deal on your loan, you can refinance to get yourself better loan terms.
You can save money over the life of your loan
If you weren’t approved for a loan with great terms because of your creditworthiness, it might make sense to refinance if your financial situation has improved. For example, if your credit score has increased, if you got a big raise or a higher-paying job, or if you paid off debt, you may be approved for a refinance loan with better terms.
When just a small decrease in interest rate could save you thousands of dollars over the life of your loan, it’s worth considering. Not only that, but if you refinance for a shorter term, you’ll be able to pay off your debt faster and save even more in interest (though your monthly payments will be higher, so make sure you can afford the increase).
You can make monthly payments more affordable
If you’re struggling to make your car payments, a refinance could help. If you refinance for a longer term, your loan repayment will be spread over a longer period. That can lead to lower monthly payments, freeing up room in your budget for other necessities. Keep in mind that when you extend your loan term, you will end up paying more in interest. But if it could provide breathing room in your budget — or keep you from damaging your credit score by missing loan payments — you may decide it’s worth it.
You can take a rebate and still get a low APR
A popular incentive offered by dealerships is the choice between a rebate or 0% APR (usually only offered to customers with great credit). Say a lender offers you 0% APR or a $3,000 rebate. If you take the rebate, you are left with a 6% APR. Instead of choosing the 0% APR over the rebate, you can take the rebate and try to refinance for a lower APR than 6%. So, if you already took the rebate and you’ve been stuck with a higher APR, you may be able to get a lower one through auto loan refinancing.
*Above scenario is hypothetical and may not be true for every borrower.
The cons of refinancing a car
You may not see much savings
If you’re far into your loan term and don’t have too many payments left, a refinance may result in negligible savings. In some cases, it may even result in you paying more in total interest.
This is because of loan amortization, which means that during the early months and years of your loan, your payments go largely toward paying down the interest rather than the principal. If you’re near the end of your car loan term, you’ve likely paid off a majority of the interest already. At this point, reducing your interest rate won’t matter very much.
Refinancing and getting a new car loan will reset your schedule, and even with a lower interest rate, you’d be starting off with interest payments again. Depending on how much time there is left on your loan, you could end up with very little savings or even paying more in interest over the life of the loan.
You may find it difficult to qualify
Refinancing a car isn’t as simple as having good credit and a stable income. With auto loans in particular, the condition and age of your vehicle and sometimes even the make of your car will all factor into whether or not you qualify for a refinance. Many lenders will not refinance a car that’s more than ten years old or that has more than 125,000 miles on it.
It’s also important to remember that while your car may still drive, its value on paper will determine whether or not it qualifies for a loan. If your insurance company wrote off the car after an accident, for example, it would not be eligible for a refinance.
Note that most lenders also require a minimum loan balance for refinances. So, if the amount you owe on your current auto loan is below that threshold, you won’t make it past the application stage.
You may have to pay a prepayment penalty
Both your existing loan and your new loan will likely cost you fees when you refinance. Because refinancing an old loan involves paying it off early, you may be on the hook for prepayment penalties. Meanwhile, the new loan will likely come with origination fees. These fees can add up, and unless you’re making significant savings on interest over the long term, it may not be worth the time and effort to get a new loan.
You could go upside down on your loan
When most people refinance a car loan, they extend the life of the loan and thus reduce their monthly payment amount. This makes your bills much more affordable, but it increases the total amount you owe since you’ll be paying interest for a longer period of time. If refinancing makes your loan worth more than your car, that’s called “going upside down.”
In this situation, even if you were to sell your car for exactly what it’s worth, you’d still need to come up with additional money to pay off the loan amount. This is why so many lenders have specifications regarding the age and condition of a car and why it’s important to run your numbers and shop around before taking out a refinance.
You may experience a temporary dip in credit
It’s common for your credit score to dip slightly after any kind of hard inquiry, including the credit check required to refinance. So, if you have other personal finance goals, such as buying a home or taking out school loans, you’ll want to keep that in mind before you risk your credit. Having a lower credit score could lead to higher interest rates when applying for loans, including personal loans and new credit cards.
Fortunately, the dip after a credit inquiry is usually only five points or less. It’s also temporary. As long as you make your payments on time, your score will rebound.
How to refinance a car
If you’re ready to refinance your car loan, you’ll need to follow these steps:
Step 1: Check your current car loan
First, take a thorough look at your current loan. Make sure you know the remaining balance and how much time is left on the loan term. Check to see if there are any prepayment penalties you’ll need to factor in as a cost for taking out the new loan.
Step 2: Check the condition of your car or vehicle
Make sure you know the age and current mileage of your car. Collect these details and keep them handy. You’ll need to compare them to each individual lender’s requirements before you apply.
Step 3: Check your credit score
Now it’s time to look at your finances. Based on your credit score and credit history, are you likely to qualify for a refinance? While each lender has their own parameters for judging your creditworthiness, a bad credit score is unlikely to get your application through. Go to AnnualCreditReport.com to get your free annual credit report if you don’t have the numbers already.
Step 4: Apply for the loan
Now it’s time to make a list of lenders whose requirements you meet. Once you have that list, see if there are any loans you can get pre-approved for. If not, narrow it down to your top choices and submit applications. This is typically a quick and simple process, but you will need certain documents on hand to complete the application. These include:
Proof of income
Proof of insurance
Proof of residence
Vehicle registration details
A copy of your driver’s license
Details of your original loan and payoff amount
Compare auto loans on Navient Marketplace
Are you considering an auto loan refinance? Whether your goal is lower monthly payments or a lower interest rate, Navient Marketplace can help you find what you’re looking for. Just fill out a few details about you, and in less than a minute, you’ll be automatically matched with offers from top auto loan providers. Then compare, contrast, and choose the best offer for you. Ready to get started on Navient Marketplace? It’s fast, free, and it won’t affect your credit score.