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When To Refinance Your Car: A Decision-Making Guide

Molly Grace5-minute read
October 06, 2021

If you’re in the process of paying off the auto loan you took out to purchase your car, you might be wondering if it’s possible for you to refinance that loan. More importantly, you may find yourself asking, “Should I refinance my car?”

The great allures of an auto refinance include more manageable monthly payments, lower overall interest costs and even changing your loan term. That said, the cost of the new loan may be more money than it’s worth.

We broke down a complicated financial decision into a simple screening process for yourself.

When Should You Refinance Your Car Loan?

First, it’s important to evaluate your current financial needs and determine whether anything has changed that could get you a lower interest rate, shorter loan term or a lower monthly payment this time around.

Let’s take a look at some reasons why you should consider an auto loan refinance, and determine if it’s the right time for you to refinance.

Lower Interest Rate

The most compelling reason for an auto refinance is if you’re able to snag a better interest rate. When you lower your interest rate, you decrease the amount of money you’ll pay in interest over the life of the loan, saving you money in the long term. You might be able to get a better interest rate than your original loan for a few reasons.

  1. Interest rates have gone down since you first got your existing loan. Interest rates are always fluctuating depending on the market. If rates are currently lower than they were when you initially applied for your current auto loan, you could save enough money on interest over the life of the loan to make it worthwhile.
  2. Your credit score has improved significantly since you got your loan. Lenders look at your credit score to understand how credit-worthy you are, which is a big factor in your interest rate. If you’ve improved your bad credit by getting it into the “good” or even “excellent” range, you should consider doing some research to find out which interest rates are now available to you on a new loan.
  3. You know more about auto lenders now than you did when you applied for your current loan. If you financed your purchase through your dealership, it’s possible that you didn’t get as good of an interest rate as you could have. If you went with the first bank that offered you an auto loan or got dealer-arranged financing, you might want to learn how to compare APR with other auto lenders or a credit union.

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Shorter Loan Term

You can also refinance to adjust into a shorter term so you pay off your car loan faster, and pay less in interest over the life of the loan. Refinancing into a shorter term can make a lot of sense if the following ring true:

  1. Your income has increased significantly since you first got the loan. You may now have the bandwidth to pay off debt as quickly as possible and with as little interest as possible.  Just be sure to calculate how much your monthly payment would increase, and double-check that your budget can handle it.
  2. Your current loan has a prepayment penalty stipulation. Nobody wants to be penalized for deciding to make an extra car payment every once in a while. Now you know to read the fine print in your car refinance.

If your original loan allows for prepayments, a refinance may only make sense if you can secure a lower interest rate. On the other hand, if your current loan does include a prepayment penalty, it might not make sense to refinance unless the money you save in interest is greater than the prepayment penalty.

Lower Monthly Payment

You also have the option to refinance into a longer term for a lower monthly payment, but this generally isn’t ideal, given you’ll pay more in interest. However, this can be a useful measure to avert disaster if you’re at risk of defaulting on your loan. If you’ve suddenly hit hard times and are having trouble with large monthly car payments, extending the loan to lower your monthly cost may be your best option.

The first thing you should do if you run into this predicament, though, is to contact your current lender, and see if there are any options aside from an auto refinance to prevent you from defaulting on your loan. They may be more amenable to helping you out than you think.

Rocket AutoSM is here.

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Auto Loan Refinancing FAQs

When can I refinance my car loan?

You can technically refinance your auto loan as soon as you drive off the lot. There is no minimum amount of time you have to wait before refinancing. In fact, because borrowers pay more interest upfront, you’re likely to save more if you refinance sooner rather than later.

If you’re seriously considering refinancing your car loan, you should know that some lenders won’t refinance loans they originated. Ask your current lender, but be sure to shop around for the best deal either way.

What are the typical auto refinance requirements?

Lenders often set limits on the age and mileage of cars that they’ll lend on. So, if your car is over 7 years old or has more than 100,000 miles on it, it may be more difficult to find a lender that’s willing to work with you. Same goes if you’re upside down on your loan, meaning you owe more on the loan than the car is worth. Shop around before you give up.

Even if a lender is willing to refinance your car loan, you should still do your own math to make sure it makes sense for you, and that you won’t be paying more in finance fees or interest than it’s worth.

Does refinancing a car hurt your credit?

If you’re borrowing, you needn’t worry that rate shopping will hurt your credit too dramatically. As long as you keep all your hard inquiries within a 14-day period, they’ll only impact your credit score as a single inquiry.

The Bottom Line: Do Your Math And Shop Around

So, you’ve run the numbers and decided it’s time for you to refinance your car. You’re sure you’ll be paying less on the life of the loan or that your new lower monthly payments aren’t canceled out by paying more interest over time.

You have a bit of homework to do, including comparing interest rates and loan terms with a few different lenders. Be sure to include Rocket Loans® in the mix and get a quote without impacting your credit score at all.

Rocket AutoSM is here.

Find your perfect car or truck, completely online.

Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.