When Should You Refinance Your Car Loan? How Long Should You Wait?

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Knowing when to refinance your car loan isn’t always easy. But if you know what questions to ask and how to approach your loan, you’ll have a much easier time making the right call. On average, the best time to refinance your car loan is when it will save you money or help you get a lower monthly payment. In some cases, you can refinance to take advantage of both of these points. With that said, there are also times when it’s not a good idea to refinance your car loan. We’d like to help make sure that you know when the time is right and when it’s best to wait.

When to Refinance Your Car Loan

You want to pay attention to several key factors so that you can be sure to refinance at the right time. Let’s discuss each of these factors, so you’ll make the best decision for your needs.

Your Credit Has Improved

As one of the most important factors to consider, improved credit may mean that you can get a better loan option, thereby saving you money. Your credit score is essential to lenders, as it tells them whether you are a good candidate for borrowing money. The higher your credit score, the more likely you are to pay back your loan on time. Therefore, lenders are more apt to roll out the red carpet in terms of getting you the best rate possible. Your APR ( Annual Percentage Rate ) is largely dependent on your credit score. The higher the APR, the more you will be paying back in interest. As such, you’re more likely to get a better deal when you walk in with a respectable credit score. As you can see, scores, rates, and terms all go hand-in-hand. If you want to be sure that you’re going to walk out with a reasonable loan, it’s best to come prepared. If your credit score isn’t in the best shape, it may be in your best interest to wait until you’ve repaired it. So, how much of a difference does a good credit score make when getting a car loan? Let’s look at an example that’s based on a $25,000 loan over six years. If you visit your lender with a credit score of between 560 and 579, the interest you’ll owe is 17.44%, totaling $15,486. Conversely, signing up for the same loan with a credit score of between 680 and 719 would give you an interest rate of 7.13%, which totals $5,801. That’s nearly a difference of $10,000 over six years! It’s clear that credit matters, so if your score has improved since first taking out your car loan, it could benefit you greatly to refinance. But before you head down to your lender to do so, be sure to read the rest of this article. We’ll also discuss some reasons that might make more sense to leave your loan alone, even if your credit score has improved. First, let’s finish looking at which factors might mean it’s time to refinance.

Loan Rates Have Gone Down

It’s always possible that consumer loan rates have gone down since you first took out your car loan. If this is the case, you stand to save a considerable amount of money by refinancing. When loan rates drop, you might be able to qualify for a better APR. And if you remember how important your APR is, you’ll know this isn’t something you want to miss out on. So, how often do loan rates change? We just saw one as recently as March of 2020. The differences don’t look like a lot on paper (0.25%, for example), but they add up to big savings over the course of your agreement.

You Need a New Loan Term

Given that many people have experienced challenges with steady employment since the pandemic, it’s understandable if you need a new loan term. In doing so, you could potentially reduce your monthly payments to something you can more comfortably afford. When you want to pay less each month, you need to keep in mind that you’ll have to extend your loan. This means you’ll be in debt longer. But that’s not all. You’ll also be paying more in interest since your loan will be extended. However, if you’re having a hard time making your required payments, getting a new loan term might be the wisest move. Yes, you’ll be paying more in the long run. But if it means meeting your loan agreement and potentially avoiding having your car seized, it’s likely the smartest call you can make. Now, with all that said, a new loan term isn’t just for people facing financial difficulties. On the contrary, maybe you’ve been blessed with more money and can now afford to make a higher monthly payment. Why would anyone want to do that? Because it will not only get you out of debt sooner, but you’ll end up paying less in interest fees. It’s a win-win. However, you should only do this if you’re sure you can comfortably afford it each month. If you can, by all means, go for it. Get paid off, get out of debt, and enjoy financial freedom sooner rather than later.

Your Car Has Positive Equity

If you discover that your car is worth more than what you actually owe on it, you may be able to get a better APR. This is known as your loan-to-value ratio and is rather easy to figure out. You’ll first need to contact your lender to find out what you have left to pay. Take that number and divide it by your vehicle’s value. For example, if you still owe $2,000 on a vehicle that’s worth $4,000, you’d have a loan-to-value ratio of 50%. This is a good ratio and would be reason enough to consider refinancing your car loan. On the other hand, any ratio over 100% can make it challenging to refinance. To easily determine if your car has equity, use a loan-to-value calculator .

You’re Unhappy With Your Lender

If your lender is so difficult to do business with, you might want to refinance elsewhere just to rid your life of unnecessary stress. Keep in mind that it may not do anything for your monthly payments, but at least you’ll be working with someone who appreciates you as a customer.

When NOT to Refinance Your Car Loan

Just as there are valid reasons to refinance your car loan, the same is true for waiting. Here are the main reasons why you’re probably better off not refinancing.

Your Car Is Old

Most of us have varying opinions of what constitutes “old.” However, lenders typically consider any vehicle over 10 years old as being too old to refinance. In fact, 10 years is the current going cut-off age for vehicle loans just about everywhere you look. That doesn’t mean you’re completely out of options, though. If you absolutely must refinance, it might serve you best to take out a personal loan or even trade in your vehicle.

Your Loan Is Too New

Lenders agree that it’s not a good idea to refinance your vehicle if you recently bought it. This is because your credit score needs time to recover from the hit it took on your first loan. As such, you need to wait at least six months before attempting to refinance. This holds true even more so if you bought a brand new car. Even if it’s a month old, your new loan will be for a used vehicle. You are, therefore, very unlikely to get a lower rate than what you are currently paying. The best thing to do is ride it out and let your credit score heal. Then, speak with your lender to see what kind of options you have and if it makes financial sense to refinance.

Your Lender Will Penalize you

Some lenders actually charge you a penalty fee for refinancing your loan. So even if your credit score has improved to where you can get a better rate, your penalty could negate your savings. You want to check with your lender beforehand to ensure refinancing will work in your favor. It’s also why you should always thoroughly read your agreement before signing. This will ensure that there are fewer surprises later.


We hope you are now armed with the knowledge needed to make the right call on refinancing your car loan. In many cases, it all comes down to being patient. Getting in a hurry and refinancing early could come back to bite you, so always do your homework first. For more beneficial tips on car loans, refinancing, and a whole lot more, be sure that you explore our blog page . And if you have any questions that our loan experts can help you with, don’t hesitate to contact us . Sources https://www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-an-interest-rate-and-the-annual-percentage-rate-apr-in-an-auto-loan-en-733/ https://cars.usnews.com/cars-trucks/average-auto-loan-interest-rates https://www.rategenius.com/car-loan-to-value-ltv-calculator/

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