When can you refinance a car loan, and when should you wait?

It’s possible to refinance your car loan once the vehicle title has been transferred, typically 60 to 90 days after purchase. But just because refinancing is possible doesn’t mean it’s the right choice.

Car loan refinancing makes sense if you can secure a lower interest rate or need to reduce your monthly payments. Choosing the best time to refinance depends on several factors, including your finances and credit, remaining loan balance, market rates and whether refinancing will help you meet your financial goals.

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Timing your auto loan refinance

The age of your auto loan is a critical factor to consider when thinking about refinancing. If you refinance your car loan too early, you risk unnecessary damage to your credit scores — but if you wait too long, you might not save much money.

Here’s a look at how the age of your loan affects your decision to refinance.

Poor or impossible timing: Within the first three months of your loan

The beginning of your car loan repayment isn’t a good time to refinance. In fact, it isn’t even possible to refinance until the car’s title has been transferred to your lender, which typically takes 60 to 90 days.

Even when the title paperwork is complete, it’s generally smart to give your credit scores time to recover. The hard inquiry on your credit reports during your initial loan application may temporarily reduce your credit scores, and adding a large new debt (like an auto loan) to your credit profile can also lower them. Since lenders assess your creditworthiness when determining your interest rate, you’re unlikely to qualify for a better rate if your scores have dropped.

Good timing: At least six months into your auto loan

When you’ve been repaying your car loan for six months to a year, that positive payment history should have helped your credit scores rebound from any temporary drops. Plus, your payment history also demonstrates to lenders that you can repay debts as agreed.

If interest rates have dropped since you first financed the vehicle, you may qualify for a lower rate.

“Refinancing can make sense during both improved market conditions with lower interest rates or when your credit score has significantly improved,” said Jeffrey Turley, president of dealer financing at PNC Bank. “Both scenarios could potentially lead to better loan terms or reduced monthly payments. Keep in mind that individual circumstances dictate the best timing.”

Questionable timing: Fewer than two years remaining on the loan

Most car loan lenders use simple interest calculations, meaning you pay the bulk of the interest toward the beginning of the loan. As you approach the end of your repayment term, on the other hand, most of your monthly payment goes toward the principal.

Refinancing a car loan saves money when it reduces the interest you pay overall. If you wait to refinance with fewer than two years remaining, you likely won’t see substantial savings because you’ve already paid off most of the interest. In fact, the fees associated with refinancing may negate any small savings you might receive.

Should you refinance your car loan?

Consider the following scenarios to decide whether refinancing your car loan is the right move:

When refinancing makes sense

• Your credit scores have improved. As a result, you may qualify for a lower interest rate. A lower rate could decrease your monthly payment and increase your overall savings on the loan.
• You need to reduce your monthly payment. In this case, you may consider refinancing your car loan to a longer repayment term. (Remember that lengthening your loan term will result in a higher overall cost of borrowing, thanks to accruing interest, even if it reduces your monthly dues.)
• Auto loan rates have dropped. In this scenario, you could reduce your total interest costs by refinancing into a loan at a lower rate.
• You want a new lender. If you’ve had problems with your current lender, you might switch to a competitor with better customer service. Or you may want to refinance with an institution you already do business with, such as the bank or credit union where you house your savings, to streamline your finances.
• You financed your first loan through the dealership. Dealer rates are typically higher than banks or credit unions charge. If you didn’t shop around before financing through a dealership, you may be able to compare offers and find a better rate.

When refinancing may not make sense

• You have bad credit scores. This will likely only beget high interest rate quotes. If your credit scores were higher when you originally financed the loan, you’re likely to receive a higher interest rate and pay more for the loan.
• You bought or refinanced the car recently. Many lenders require at least six months of on-time payments before they’re willing to refinance your loan. And if you’ve recently originated a loan, your credit scores could need time to rebound.
• You’re close to paying off your loan. You’re unlikely to save much in interest if you refinance close to the end of the term since most of the interest charges are paid at the beginning of a loan. Plus, since lenders typically have minimum balance requirements ($5,000 is common), you may not owe enough to qualify.
• Fees wipe out your savings. Between the fees associated with the refinance loan and a potential prepayment penalty for repaying your original loan early, you may pay more in fees than you’ll save.
• You owe more than the car is worth. Many lenders won’t refinance an “upside-down” car loan, or a loan with a higher balance than the car is worth. Even if you find a lender to refinance a car with negative equity, you’ll likely pay a higher interest rate, increasing your overall cost.

Is refinancing worth it?

Generally, refinancing is only worthwhile if you can save money.

For example: A $40,000 auto loan with a repayment term of 60 months and a 9.00% fixed interest rate has a monthly payment of $830.33. If you repaid the loan for a year, your remaining balance would be $33,367.

Let’s say you improve your credit scores and now qualify for a 48-month loan with an interest rate of 7.00%. Not only would you save $31 each month, but you’d see a total savings of $1,507 in interest. If the cost of refinancing is less than the savings, it could be worthwhile.

Use an auto loan refinance calculator (like this one from Calculators.org) to estimate your savings and decide whether refinancing makes sense. If the benefits outweigh the costs, seek preapproval with several refinance lenders to compare rates and find the best deal for you.

Tip: To find and compare auto loan refinancing lenders, start with your current lender and your bank or credit union. Then shop around with other direct lenders and loan aggregators to determine which lender can offer the most affordable refinance loan.

Common auto loan refinancing requirements

If you’re considering refinancing your auto loan, you’ll need to confirm you qualify for a new loan. Although eligibility requirements for refinancing are similar to those for a purchase loan, there are some important differences to consider.

Borrower requirements

The lender will determine your creditworthiness by reviewing your credit report and credit scores. The better your scores, the more likely you are to be approved and receive favorable terms. More than two-thirds of loans go to borrowers with credit scores of 661 or above, according to Experian.

Lenders also review your debt-to-income (DTI) ratio to determine whether you have the cash flow to repay your loan. Your DTI ratio is the total amount of your monthly debt payments divided by your gross monthly income. For example, if you have $2,000 in debt payments and a gross income of $4,500, your DTI ratio would be about 44% (2,000 / 4,500 = 0.444, or 44.4%).

Many lenders require a DTI of 46% or lower, but a ratio below 35% is ideal. You may need to pay down other debts to reduce your DTI ratio before applying for auto refinancing.

Loan requirements

Most lenders have a minimum balance requirement and won’t refinance small loans. While this amount varies by lender, you’ll have a hard time finding refinancing for a loan smaller than $5,000.

Many lenders also require a six-month waiting period before they’ll consider refinancing your loan. This period allows time for the title transfer to be completed and for you to establish a positive payment history. Similarly, some lenders require that you have at least 24 months remaining on the loan (since they won’t earn enough in interest to make it worth their while if you’re nearing the end of your term).

Vehicle requirements

Most lenders have mileage and age requirements for the cars they’ll refinance, commonly 100,000 miles and 10 model years old, and some won’t refinance cars that are no longer in production.

Cars with branded titles, like salvage vehicles or lemons, typically have a documented history of damage or defect. Due to the decreased value and increased risk, most cars with a branded title are ineligible for refinance.

Car loan refinancing in 6 steps

The process of getting a refinance loan is very similar to the steps you took to get your original car loan — but you’ll have some homework to do before you can start comparing lenders.

1. Review your current auto loan

Snagging a lower monthly payment is important, sure, but examine your current loan contract to understand whether refinancing makes sense. Call your loan servicer or log in to your lender’s online portal and make note of the following details:

• APR: Before you start comparing offers from other lenders, consider your current interest rate. To save money overall, you’ll need a lower APR (without extending the loan term, unless you’re seeking a lower monthly payment).
• Prepayment penalty: Will you be charged a fee for paying off your original loan (via refinancing) ahead of schedule? You may have to pay as much as 2% of the remaining loan balance as a penalty, which would eat into your savings.
• Payoff amount: The loan balance listed on your last statement won’t include recently accrued interest, but your lender can provide a 10-day payoff amount that is up to date and includes any prepayment penalties. If you refinance before the 10-day period ends, this amount will fully cover your outstanding auto debt. (If you don’t refinance within that period, simply request a new payoff statement.)

2. Estimate your car’s value

Cars, especially brand-new models, are a depreciating asset and begin to lose value as soon as you drive them off the lot. If you owe significantly more than your vehicle is now worth (also known as being upside down), you may struggle to find lenders willing to refinance your loan. Even if you have positive equity, your new lender will consider the vehicle’s value when reviewing your loan application and setting your interest rate.

To find out how much your car is worth, use free online car valuation tools from industry guides like Kelley Blue Book or Edmunds.

3. Check your credit

Your credit scores play a significant role in your loan eligibility and the rates lenders offer. If your scores have improved since you got your original auto loan, you may qualify for a lower rate.

Your bank or credit card issuer may offer free access to your credit scores, or you can buy your scores from various third-party services. If they’re lower than expected, review the information on your credit reports (via AnnualCreditReport.com). Look for ways to improve your scores, such as paying down debt or disputing credit report errors.

To give you a general idea of what to expect, here’s a look at auto loan interest rates by credit score:

4. Gather financial documents

Streamline the application process by having the necessary documents ready in advance. Here’s what most lenders require:

• Government-issued ID, like a driver’s license
• Proof of income, like recent pay stubs or tax return(s)
• Proof of residence, like a lease agreement or mortgage statement
• Proof of auto insurance
• Vehicle registration
• Vehicle title
• 10-day payoff statement
• Make, model, year, VIN and mileage of your car

5. Get preapproved with multiple lenders

With your current loan details, credit scores and vehicle value in mind, it’s time to compare lenders. The best auto refinance rates can be found at banks, credit unions and online lenders — so it’s wise to cast a wide net.

Most lenders offer online preapproval, which requires a hard credit pull. This process can drop your credit scores by about five points, according to FICO. But if you limit your inquiries to a single 14-day rate-shopping window, you can minimize the damage to your scores.

With several preapproved offers in hand, compare the APRs, repayment terms and loan amounts to find the best loan for you.

Example: Suppose your current six-year auto loan has an APR of 9.00%, a balance of $30,000 and five years left on the term. Your current monthly payment is $623, and if you continue paying the loan until the end of the term, you’d pay an additional $7,365 in interest.

You’ve improved your credit scores and qualify for lower rates, so you decide to refinance your car loan. Both offers have lower APRs than your current loan, but which loan is best?

At first glance, Loan 1 looks like the better deal because it has a lower monthly payment — but Loan 2 will save you more overall because of its shorter repayment term. When comparing loan offers, consider your goal: Do you need the lowest monthly payment, or do you want to save on total interest?

If your original lender charges a prepayment penalty, be sure to take that into account when calculating your savings. In the example above, let’s say your loan has a penalty of 2% of the remaining loan balance, or $600 ($30,000 x 0.02 = $600). Even after paying that fee, either loan option would still help you save money overall.

6. Submit an official application

Once you’ve identified the best loan offer, complete an application and provide copies of the required documents.

Review the loan contract carefully before signing to ensure it matches your expectations. Be sure you understand how your original loan will be repaid — your new lender may transfer the funds on your behalf, or you may need to make the transaction yourself. Until the original loan is paid in full, be sure to continue paying as agreed to avoid additional fees or penalties.

Additional reporting by Sarah Brady

Frequently asked questions (FAQs)

How many times can I refinance my auto loan?

There’s no limit on how often you can refinance your auto loan, provided you can find a lender willing to refinance it. But proceed with caution — repeated refinancing can damage your credit because of the multiple credit pulls, and if you extend your loan term with each refinance, you’ll end up paying much more in interest.

How long do I have to wait to refinance my auto loan?

You should wait at least six months before trying to refinance an auto loan, but technically, you can refinance your loan as soon as the title has been transferred to the new lienholder (your lender).

Can I refinance my car loan with my current lender?

Yes, if the current lender is willing to refinance the loan. Not all lenders refinance their own loans.

Will refinancing my car hurt my credit?

Lenders will conduct a hard pull on your credit when you apply for refinancing, which could temporarily lower your credit scores by a few points. Over time, however, your history of on-time payments should help to improve your credit scores.

Can I refinance my car loan if I’m behind on the payments?

If you’re behind on your car payments, you’re unlikely to be approved for an auto loan refinance. Most lenders will deny your application outright, but even if you’re approved, the damage done to your credit scores from the missed payment(s) will make it difficult to qualify for a better loan than you currently have.

Instead of refinancing, contact your lender to ask if they can modify your payment arrangement. Lenders have a vested interest in helping you stay current on your loan and may offer deferred payments or a new payment plan.

What credit score do I need to refinance a car loan?

The minimum credit score you need to refinance your car loan depends on the lender, but most require scores above 550. Some bad credit auto lenders will approve you for a refinance loan with lower credit scores. However, the higher your scores are, the easier it will be to get approved by a reputable lender and qualify for low interest rates.