Is It a Good Time to Refinance My Car Loan?

Taking out a car loan isn’t a life sentence. And you’re not necessarily stuck with the original terms of your loan. You can always reach out to your lender to ask, “Can I refinance my car loan?” If your lender says yes, you could save hundreds or thousands of dollars your current loan.

The main question though, isn’t “Can I refinance my car loan?” but “Is it a good time to refinance my car loan?”

The good news is that regardless of how long you’ve had your loan, there’s no minimum amount of time you have to wait before refinancing your current car loan. Loans can be refinanced immediately after you purchase the car—even before you make your first car payment.

The most important thing is to ensure that refinancing saves you money and won’t end up in your spending more money.

How to Refinance Your Car Loan

To begin the refinancing process, all you need are the following:

A new loan that offers you a better deal than your current loan
All the information about your existing loan, including details about your current lender, account number and loan balance
All the information about your car such as the model, year, VIN and so on
A proven testament of your ability to pay back the loan balance

Reasons to Refinance a Car Loan

People refinance loans for various reasons. But the best reason think about refinancing your loan is to get a better rate. When you do, you can save money—sometimes a lot of it. For instance, if you have a good credit rating, and refinance a $20,000 car loan, you could get an interest rate as low s 2.38%.¹You can use the Auto Loans calculator on Credit.com to look at Refinance options for you. Just select “Refinance” under “Auto Loan Type.”

Thanks to the lower interest rate you get from your new loan annual percentage rate (APR), you could end up paying less assuming over the course of your loan. You could also reduce the amount of your monthly payment to make it easier to cover your monthly expenses.

If it’s possible to switch out your existing loan for a lower rate, you should refinance as soon as possible. Thankfully, most auto loans are classified as amortized loans. For amortized loans, the interest is paid before the principal, so you pay less interest overall.

Secure the Right Kind of Lower Monthly Payments

Lower monthly payments aren’t always a good thing. If you secure the lower payments due to lower interest rates, you can save money only by refinancing early in your loan period. If you choose to refinance after several years, you end up restarting the interest cycle and the amortization process. And, you can end up paying interest for a long time, which could end up costing more even though the monthly payments are lower.

So beware, and look at the cost of the loan and the money you’ll spend over the lifetime of the original loan and your refinance regardless of the interest rate and monthly payments.

Refinance When Your Credit Scores are Better

With a better credit score, you can get a better loan from your lender. A better score makes it easier to get a lower interest rate, secure a low fixed rate and maybe even do without a cosigner for the loan.

Keys to Understanding if Is It a Good Time to Refinance My Car Loan?

While it may seem like refinancing is a good idea, there are some pitfalls to be aware of when switching from one loan to another, including the following.

1. Extending Your Tenor

The tenor of a loan is the term use to describe the length of time until the loan is due. So, if you are four years in to a five-year loan, your tenor is one year.

If you extend the tenor of your loan when you refinance, you end up paying more even if it means a lower monthly payment. It may seem smart to move from a 24-month loan term to a 48-month loan term. But if you do, you actually end up paying more in interest overall.

Consider a longer loan only when your cash flow is constrained and you have no other option. Otherwise, stick with your current terms and tenor.

2. Going Upside-Down

By extending the life of your loan, you could cause it to become upside-down. In simpler terms, you may end up owing more on your car than what it’s actually worth. That can make it harder to get sell the car or get any benefit from trading it in, because you’ll need to write a check to the lender or continue making payments on a vehicle you no longer have.

And because maintaining your credit requires you to continue making payments, you want to pay off your loan in line with the car’s actual value. This way, you can sell or trade the card for at least a break-even amount if not a profit.

3. Don’t Miss Payments

If refinancing your car loan, don’t assuming your lender has the process under control. Make sure, but don’t assume, your initial loan is closed and that you can stop making payments. Any delays in the process can lead to a missed payment, which can negatively affect your credit and your ability to secure a refinance.

How Do I Refinance My Car Loan?

Before getting a new loan, you need to apply for a new one, whether the new loan is with the same lender or a different one. Applying for a refinanced loan is usually seamless and can be completed without any hassle. Your lenders—if different—will work together to complete the necessary logistics.

To kick off the refinancing process:

Gather all the information about your previous loan. If you don’t know where to get the information, simply find the most recent statement from your lender as it should the details you need.
Get all the information about your car, such as the model, year, VIN and so on.
Submit proof of income to your new lender to prove you have the ability to repay the loan. Some lenders accept recent paystubs. Others require different Check with your lender to find out what information is needed.

After gathering all the needed information, simply submit your application and other documents needed by your lender. It shouldn’t be long until you find out whether your refinance is approved.

¹As calculated using the Auto Loans calculator on Credit.com in December 2018. Currents rates may vary.

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