When Can You Refinance a Car Loan?
You don’t need to wait a specific period before refinancing your car loan. You just need to meet all the requirements for the new loan in order to refinance. You can refinance right after purchase, even before making your first monthly payment. Just make sure you’re truly getting a better deal and that refinancing doesn’t make you pay more for your vehicle.
Note: In some cases, you may not be able to refinance until you get documents from your state’s Department of Motor Vehicles. Collecting registration details can slow down the financing process a bit.
What You Need to Refinance a Car Loan?
To refinance your current loan, you need the following:
- A new loan with better terms or rates than your current car loan
- Details about your current loan, including the current bank, your account number, and the current loan balance
- Information about your car, including the make, model, year, and vehicle identification number (VIN)
- Documentation proving your ability to repay the new loan, such as pay stubs or tax returns
The Best Reason to Refinance: Pay Less Interest
The ability to borrow at a lower interest rate is the primary reason to refinance a loan. This lower rate means you pay less for your car after accounting for all your borrowing costs. Since the interest rate is part of the monthly payment calculation, the payment required from you should also decrease. Thus, managing your monthly cash flow becomes an easier task.
When you can replace your current loan with a lower rate, it’s best to refinance as soon as possible. Most car loans are amortized loans, meaning you make a fixed monthly payment with interest costs built into the payment.
Over time, you will reduce your debt, but you will pay most of the interest costs at the beginning of the loan. Therefore, it’s better to lower that rate sooner rather than later to start reducing costs. An amortization calculator can show you exactly how much you can save by refinancing.
Can Refinancing Lower Monthly Payments?
Refinancing may lower your monthly payments, but this isn’t always a good thing. If you can achieve lower payments due to a decreased interest rate, you might save money (as long as you refinanced early in your loan term). However, if you waited several years before refinancing, you are restarting the interest cycle and the aforementioned amortization process, and you’ll pay interest for several more years. This could cost you more, even with the lower monthly payments.
If you’ve improved your credit scores since obtaining the original loan, you may be able to obtain a better loan. You might qualify for a lower rate, secure a low fixed rate, or even remove a co-signer from the loan.
Your credit scores improve when you make loan payments on time (or when you eliminate negative items from your credit reports after seven years or more). Successful payments can elevate your credit scores to a level that increases your borrowing options. Even one year is enough to see improvement – so it’s good to check if your scores have risen enough to qualify for a better loan.
Common Mistakes to Avoid
Refinancing can be tempting, but it’s easy to end up spending more money than you need to. Avoid the most common mistakes – especially if you have a few years left on your car loan.
Extending It
Typically,
What a long-term loan means is that you will pay more for your car. It may be tempting to switch from a 48-month loan to a 72-month loan, but you will typically pay more interest over the life of the longer loan. Longer terms lead to lower payments – which can provide great relief when cash flow is tight. However, the cost of long-term loans is generally higher (even though you see a lower payment). An amortization schedule can show you how your interest costs accumulate over time.
The flip side
Extending the loan term can also lead to your loan being upside down. In other words, you may owe more on your car than it is worth. To get rid of the car, you would have to write a check to your lender or continue making payments on a car you no longer use.
It’s crucial to keep making payments (to avoid impacting your credit) even if your car breaks down and becomes unusable. It’s best to pay off loans quickly so you can easily sell cars (and buy a different, cheaper car if needed).
Prepayment penalties
There may still be prepayment penalties, and you might have to pay an additional amount if you pay off the loan before the term ends. Make sure it won’t cost you anything extra to pay off your current loan early. Penalties can sap any savings you get from a lower interest rate.
Waiting too long to refinance
If you crunch the numbers and determine that refinancing makes sense, waiting can cost you. Rates are typically lower on new vehicles, and some lenders may not refinance auto loans older than a certain age (for example, seven years). You may even get a “new car” rate if you refinance right after purchasing from a dealer and take advantage of the incentives the dealer offers. Used car loan rates are generally higher than new car rates.
Missing payments
Stay on top of things throughout the refinancing process, and don’t assume anything is complete. You may think the current loan has been paid off and you can stop sending payments, but any delay in the process can lead to a “missed” payment. Any late payments will affect your credit and your ability to refinance.
Note: Be sure to confirm with both lenders before stopping payments.
How to refinance
To get a new loan, you need to apply with a new lender. In most cases, the process is relatively easy – lenders work together to handle the logistics, and you just need to submit an application.
To prepare:
- Gather relevant information about the current loan. The latest statements from the current lender should have the details you need.
- Get information about your vehicle (if you’re not bringing the car with you). Your vehicle identification number, make, model, and year are very helpful.
- Prepare proof of income so lenders can verify your ability to repay the new loan. A few recent pay stubs should be sufficient, but check with the new lender for specifics.
Submit your application, along with any required documents, and respond to any questions from the lender. Many lenders can provide an approval decision on the same day you apply, or within a few days.
Where to refinance?
Any lender offering competitive rates and fees is worth considering. For many borrowers, a local bank or small credit union is a great option. These institutions tend to offer low-interest rates and often are more flexible regarding loan amounts and credit issues. Online lenders are another good source. You can do everything at any time and anywhere that is convenient for you, plus find excellent rates online.
Note:
Get quotes from at least three lenders and make all your purchases within a few weeks.
When lenders check your credit, your credit scores drop slightly. Multiple inquiries become problematic over time, but you won’t face a penalty when shopping for rates – just submit all your applications within 14 to 30 days.
Frequently Asked Questions
Can you refinance a car loan with bad credit?
You may be able to refinance a car loan with bad credit, but if your credit scores are worse now than when you obtained the original car loan, refinancing may not be beneficial for you. Lenders are less likely to provide better terms through refinancing if your credit scores have declined.
How often can you refinance a car loan?
You can refinance a car loan as often as you can find a lender willing to refinance it for you. However, frequent refinancing in a short span of time may be seen as a red flag by lenders.
How much does it cost to refinance a car loan?
The main costs of refinancing a car loan consist of lender fees and title fees. Lender fees typically range around $10, while title fees can be about $75.
Source: https://www.thebalancemoney.com/when-can-i-refinance-my-car-315100
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