When Can You Refinance Your Car Loan?

You can refinance your car anytime, which can help you lower your monthly payments or bring down your interest rate on the loan. However, depending on your situation, it might not make the most financial sense. There are a few factors you'll want to mull over.

Can I refinance a car loan?

You can refinance a car loan, and it usually is quicker and easier than refinancing a home loan. You can work with your current lender or a new one to obtain refinancing. When you refinance an auto loan, you take out a new loan to pay off the existing one. The main draw? You can either bump down your monthly payments or lower your interest rate.

When you refinance your car loan and it results in lower payments, it can relieve you financially and free up some cash. Plus, it gives you more time to pay it off. However, it extends the life of the loan, and that also means you might be paying more in interest.

If you refinance your car loan and your new loan is at a lower interest rate plus have the same or shorter term, it can help you save money. 

How soon can I refinance a car loan?

You can refinance your car loan at any time. There's no waiting period, which means that you can refinance it right after you purchase your car and take out a loan. Plus, you can refinance as many times as you like, as long as you find a lender who you can work with on getting a new loan.

However, some lenders won't refinance if you already have a loan with them. Further, some lenders have time constraints as to when you can refinance. For instance, some lenders require you to wait at least six months after your current auto loan to apply to refinance.

While you can shop around for refinancing as soon as you purchase your car, it's a good idea to wait until the title and other paperwork of your current car loan have gone through. Some lenders won't approve your application to refinance until the title is processed and transferred.

And because your credit score slightly drops  after you apply for a car loan, it could benefit you to wait a little bit for your score to increase after the hard inquiry on your credit. While a hard inquiry can stay on your credit for up to two years, it won't impact your score after a year. Sometimes, they won't have any effect whatsoever after a few months.

When should you refinance your car loan?

Poor original car loan

Let's say you didn't do your research. If you received a bad deal on the interest rate on your car loan you can save on interest if you refinance to a loan with a more favorable interest rate.

Improvement in your financial situation

If your financial situation has changed, it might be a good idea to refinance your car loan. For instance, maybe you landed a better-paying job, so your income is higher. Or you've been aggressively paying off debt, which lowers your debt-to-income (DTI) ratio. Or perhaps your credit score increased. These improvements in your finances could mean getting approved for a loan with a lower interest rate. 

Lower monthly payment

You'd like a lower monthly payment. Maybe hours have been scaled back on your job, you're undergoing a major life change, or you realize that your expenses are higher than you can manage. If that's the case, then refinancing can help lower your payments. 

You’re upside down on your car loan

It might also serve your best financial interests to refinance if you're upside-down on your car loan. In other words, the amount you owe is more than the car is worth. In this situation, if you refinance your loan with a lower interest rate than your existing loan, it could help you get out from under it.

Problems with current lender

If you're having a difficult time with your current lender, and are experiencing poor customer service, inconsistent communication, or some other challenges, you might want to refinance to a different lender altogether.

Reasons you shouldn’t refinance your car loan 

It might not be a good idea to refinance if you will lose money by refinancing. For instance, the fees will gobble up anything you might save with a new, lower interest rate.\ No matter what the decision, beyond the interest, it's a good idea to look at the other fees involved in refinancing, such as origination fees and lender and title fees. There might also be prepayment penalties on your existing loan.

Frequently asked questions (FAQs)

Can I refinance my car loan at any time?

Technically, you can refinance your auto loan as soon as you like, as often as you like.  However, some lenders might not consider your application to refinance until the title of your car has been processed, which can typically take a few weeks. Also, you'll need to find a lender—either your existing one or a new one—who is willing to refinance.

And since your credit goes down slightly due to the hard pull from getting a car loan, it also might be a good idea to wait until your credit score improves. This could take a few months. 

Does refinancing a car hurt your credit score?

When you apply to refinance your car, it results in a hard pull of your credit. This usually results in a slight, temporary decrease in your credit score. While refinancing could lower your score, it might be worth it if it could save you on the interest or lower your car payments.

What do you need to refinance your car?

Lenders will look at your history, mileage and make and type of vehicle during the application process. They may also look at financial criteria like your credit score, income, debt-to-income ratio, the loan-to-value ratio on your car, and employment. To refinance your car, you'll need to gather essential documents such as your driver's license, proof of insurance, vehicle registration, the vehicle identification number (VIN) of your car, proof of employment (pay stubs from your current employer or tax documents if you're self-employed). You'll also need to provide the balance, interest rate, and monthly payments on your existing car loan.