When To Refinance Your Car Loan & When To Wait

Refinancing your car loan entails swapping your current loan out for a new one with different terms. But maybe you’re wondering if it is a good time to refinance or if you should hold off. Before deciding, you’ll need to review the lender’s requirements and determine if it charges prepayment penalties. It’s equally important to consider the amount of time remaining on the loan term, your credit score and overall financial health.  

4 reasons to refinance a car loan 

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

1. You need to change your monthly payment

If your income has decreased recently, or you want to free up funds to meet other financial goals, it could 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 will have to take a longer term to lower your payment, which means you will pay more interest over the life of your loan. 

2. Your credit score increased 

The best interest rates on auto loans are generally reserved for buyers with good or excellent credit — typically a score of 670 or higher. If your credit score has improved since you secured your current loan, you could qualify for a new loan with more favorable terms. 

3. You financed through a dealership

Dealer financing usually doesn’t come with the best possible interest rates. When you finance in-house the dealer shops your information around to lenders in its network. Some lenders pay higher commissions than others, so the dealer may set you up with a higher-paying lender — even if there’s a better rate offered. 

4. Interest rates dropped

Interest rates on car loans change with the prime rate and market conditions. If it’s been a while since you took out your current loan, average car loan rates could be lower. 

When to hold off on refinancing 

Even if you can get a lower monthly payment or interest rate, there are situations where it may be sensible to hold off on refinancing. For starters, if your current lender charges prepayment penalties for paying your loan off early, refinancing could be costly.   

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

Some lenders may turn you down for financing if your car is older or has over 100,000 miles on it. Your application for financing could also be denied if you’re upside down on your car loan or behind on your loan payments.  

How to refinance your car loan 

Once you find and prequalify with a lender to refinance your car loan, reach out before you fully apply to determine what information and documents are needed to process your loan application. Most lenders will request a copy of your driver’s license, a 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 for your vehicle.  

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

The bottom line 

Refinancing your car loan could be a smart financial move if your situation has changed since you took out your current loan. But before you secure a new loan, use an auto refinance calculator to determine if the benefits outweigh the costs. Also, explore potential rates to gauge if you could qualify for a loan with more competitive terms.