When to refinance your car loan

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If you’ve been wondering when is the best time to refinance a car, your timing couldn’t be better with interest rates so low.

But before you start doing the math to see how much you could save by refinancing your auto loan at a lower interest rate, here are some tips to make sure the move puts you on a more solid financial footing.

When can you refinance your car loan?

Refinancing is about evaluating how your financial situation and the borrowing environment have changed since you got your initial loan. Consider refinancing when you can lock in more favorable terms — meaning, a lower interest rate — that will lower your monthly payment and potentially lower the amount of interest you will pay over the life of the loan.

Technically, you could refinance your car loan as soon as you drive off the lot. However, that wouldn’t make much sense if you got a good rate at the time. After all, you would likely get the same loan terms since nothing had changed.

When is the best time to refinance your car loan?

Here are some key factors that can make refinancing your car loan a smart move:

  • Interest rates have decreased: The best time to refinance your car loan is when interest rates are significantly lower than when you purchased the car. If you bought your car in 2018 or 2019, there’s a good chance that could be the case; car loan rates have been on the decline.
  • You’ve improved your credit score: The better your credit, the more favorable loan terms you’ll receive. If you’ve improved your credit score since signing for your initial loan, you may qualify for better loan terms.
  • You got your initial loan at the dealership: Dealers tend to charge higher rates than banks and credit unions. Compare your current loan with offers from other sources to see if you can get a lower interest rate. Start with the bank where you have a checking or savings account, too. Some banks will offer discounts on auto loan rates for loyal customers.
  • You need lower monthly payments: Sometimes refinancing a car loan is about making the payoff journey a bit longer so you can manage the monthly payments. If you need to reduce your car payment, you could refinance a loan with a lower rate but with a longer term (from 36 months to 48 months, for instance). Although you will pay less per month, expect to pay more over the life of the longer loan.
  • You want to buy the car you’re currently leasing: Car leases typically include an option to buy at the end of the lease. You can get a refinance loan to buy the car outright when your lease expires, although this approach has its pros and cons. If you want to save money on a lease-to-purchase deal, make sure that the total cost of buying the car, including interest on your refinance auto loan, would be lower than extending the lease or leasing a different car.

When is it a bad idea to refinance your car loan?

Refinancing your car loan doesn’t always make financial sense. If you answer ‘yes’ to any of these questions, it’s probably best to keep your current loan.

  • Are you really far along in paying off your existing loan? Through the amortization process, your interest charges gradually decrease over the life of the loan. As a result, a refinance has more potential to save money when you’re in the earlier stages of repaying the original loan.
  • Is your odometer hitting big numbers? If you’re driving an older car with high mileage, you may be out of luck. Most lenders won’t find it worthwhile to issue a loan on a car that has significantly depreciated in value.
  • Are you upside-down on the original loan? Lenders typically avoid refinancing if the borrower owes more than the car’s value (also known as being “underwater”).
  • Does your current loan have a prepayment penalty? Some loans charge a penalty for paying it off early. Before you refinance your loan, investigate the terms of your existing loan to make sure there are no prepayment penalties.

What you need to refinance

Be prepared to provide a new lender with your loan statement, which shows the number of payments remaining and how much is still owed. Also have information about your car handy, such as make, model, mileage, VIN and other essential details to help the lender determine its value.

You’ll also need to prove that you can pay the loan back. Be prepared to document your income with employment information. Most banks will let you submit an application to refinance online.

Use Bankrate’s Auto Refinance Calculator to see how much you’ll save each month and how much interest you’ll pay with a 36-month refinance versus a 48-month refinance.