Determining when to refinance a car loan is more complex than it seems. Refinancing your car loan entails swapping your current loan for a new one with different terms. But there are more factors to consider than just picking a new lender. Whether it’s a good time — or a bad time — depends on the market, your finances and the state of your loan and the car itself.

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Key takeaway
Refinancing could be a smart financial move if you need a more affordable monthly payment or if you can qualify for a better interest rate.

When you should refinance your car loan

If you plan to refinance your car loan, focus on your monthly payment and how much you will save on interest.

You need to change your monthly payment

If your income has decreased recently, or you want to free up funds to meet other financial goals, it could be time to refinance your car loan to get a lower monthly payment.

When you refinance, you either increase your loan term or find a lender with a lower interest rate. Refinancing at a lower rate is ideal — it will save you money overall and likely reduce your monthly costs.

But if you take on a longer term to lower your payment, you will pay more interest over the life of your loan. Despite that, refinancing could still be the right move for a lower monthly payment.

Your credit score increased

The best interest rates on auto loans go to buyers with good or excellent credit — typically a score of 670 or higher.

If you took out a loan at a higher rate and now have better credit, you could qualify for an auto loan with more favorable terms. It isn’t guaranteed, but borrowers with good to excellent credit may qualify for rates in the 3 to 5 percent range.

You financed through a dealership

Because dealers work with third parties and mark up their rates, dealer financing usually doesn’t offer the best possible terms. When you finance in-house, the dealer shops your information around to lenders in its network. Some lenders pay higher commissions than others, so the dealer may set you up with a higher-paying lender — even if there’s a better rate out there.

Even if dealer financing was convenient for you when you bought your car, refinancing now at a lower rate could save you money.

You have positive equity in your car

Lenders view positive equity — cars worth more than you owe — as a big plus when refinancing. This is largely because the lender stands to make more if you default, and it seizes your vehicle to sell. This possibility means the lender may offer you a lower interest rate.

Your loan-to-value ratio is the amount you owe divided by how much your vehicle is worth. You can estimate your car’s value on websites like Edmunds or Kelley Blue Book. You can use an LTV calculator to determine if you have positive equity.

You have issues with your current lender

Not every lender is willing to work with you when you face financial problems or other issues. Even small matters can snowball into an unhappy loan situation. Refinancing to a lender with good customer service reviews may save you from a headache — on top of potential savings on interest.

However, even longstanding problems may not mean it’s time to refinance. If a prepayment penalty is attached to your current loan, it may cost more to refinance than you would end up saving.

Interest rates dropped

Even if you have not improved your credit, lower average interest rates could still benefit you. Interest rates on car loans change with the prime rate, Fed rate and market conditions. If it’s been a while since you took out your current loan, average car loan rates could be lower.

According to data from Experian, the average used car rate in the third quarter of 2022 is 9.34 percent. Although refinancing rates vary, they are usually similar to used car rates. Because the Fed rate has increased and rates are rising, it may not be the best time to refinance based on rates alone.

When to hold off on refinancing

Even if you can get a lower monthly payment or interest rate, there are situations where it may be sensible to hold off on refinancing.

Your current lender charges a prepayment penalty

If your current lender charges prepayment penalties for paying your loan off early, refinancing could be costly. It may even cost you money if the prepayment penalty exceeds the amount you save on interest. You can ask your lender or review your loan documents to determine if you will face a prepayment penalty when you refinance.

You are close to paying off your loan

You should also avoid refinancing your car loan if you are nearing the end of your loan term. It is possible to refinance and get a low monthly payment, but you will likely extend your term and pay more interest.

Check lender requirements before you apply. Most lenders only offer terms of 24 months or more — although some allow you to refinance if you have at least six months left on your loan.

Similarly, hold off if you have less than $10,000 left on your loan. For a lender to make money off interest, you must borrow a minimum amount. If you don’t make the cutoff, you won’t be eligible to borrow.

You own an older car or have significant mileage

Some lenders may turn you down for financing if your car is older than 10 years or has over 100,000 miles on it. Some lenders may have stricter requirements — like eight years or less than 80,000 miles. If your car is too old or has a high number on the odometer, you won’t be able to refinance.

You have negative equity

Your application for financing could also be denied if you’re upside-down on your car loan or behind on your loan payments — even if you otherwise have good credit. Lenders view significant negative equity as too much of a risk.

You bought your car — or refinanced — recently

Lenders often require at least six on-time payments before they consider you eligible for refinancing. This is to lower the risk of default. If you can keep up with your current payments, you prove that you can handle the responsibility of your debt.

Likewise, a lender may be reluctant to approve you for a refinance auto loan if you have recently refinanced. There is no set limit to how often you can refinance, but it may reflect poorly on you if you keep refinancing your auto loan with different lenders.

How to refinance your car loan

Many lenders offer an online preapproval process so you can compare rates without committing. Apply to several and pick the best offer. Once you choose a lender to refinance your car loan, ask about the information and documents the lender needs to process your loan application.

You can apply online with most lenders or visit a branch if you want a loan from a bank or credit union. Once you submit your application, the lender will review it and run a credit check to determine if you qualify for a loan and what interest rate you will receive.

Most lenders will request a copy of your driver’s license, a utility bill and proof of income. You will also need to provide proof of insurance along with the vehicle’s make, model, VIN (vehicle identification number) and mileage.

If you are approved, your new lender will either pay off the old loan or send you the funds to do it yourself. Either way, check with both lenders to ensure all the paperwork and payments have gone through.

The bottom line

Refinancing could be a smart financial move if your situation has changed since you took out your current loan. Apply for preapproval with several lenders to explore potential rates and compare loan offers to gauge if you could qualify for a loan with more competitive terms. Then use an auto refinance calculator to determine if the benefits outweigh the costs.