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You might consider refinancing your car loan if you found a lower interest rate or better repayment terms than what you are currently paying. In most cases, you can refinance your auto loan at any time, but that doesn’t mean you should always do it.
Here are more details on when you can refinance a car loan, what the requirements are, and if it’s the right decision for you.
Can I refinance a car loan?
If you have a car loan, you can probably refinance it. Keep in mind that there are times when you might not be ready to refinance your car loan just yet. Before you decide to refinance, you should make sure you do the following:
Read the terms and conditions
Refinancing an auto loan is like refinancing any other type of loan: a new loan is taken out to pay off your existing loan, and then you make payments to your new lender. If your current lender imposes prepayment penalties, it means you could be penalized if you pay off your existing car loan before the end of the prepayment terms.
You may be able to avoid the prepayment penalty if you wait a little longer to refinance, so check the terms of your lease and do the math. If the penalty amount is more than what you would save when refinancing, it might not be worth it. However, not all lenders have this penalty, so it is essential to check the terms of your loan first.
Discover the requirements of the new lender
If you are considering refinancing with a new lender, you may first need to meet certain minimum requirements.
- Credit score: When you took out your original loan, your credit score was hit by the credit check. If it hasn’t bounced back, you might not qualify for a loan with a new lender, or if you’re approved, it might be at a higher interest rate than your current loan.
- Minimum loan amount: Lenders require a minimum amount that you can borrow. If the amount you refinance is less than this minimum amount, you will not be able to take out a car loan.
- Repayment period: Many lenders have a minimum repayment period, such as three or five years. If you’re ready to pay off your loan in a year or two, it may not make sense to refinance your loan, even if you qualify. You might end up paying off your loan for longer than necessary, which means you’ll be paying more interest overall. It also means that you will pay off a car that loses its resale value.
How long can I refinance a car loan?
You may be able to refinance your car loan a few weeks after buying it, but it depends on where you bought your car, the terms of your lease, and the new lender you plan to refinance with.
Since the documents can take some time to process, you may want to wait until you have made at least your first payment to your new lender. This helps you avoid missing payments so you can stay current on your loan and don’t hit your credit score due to late payments.
When should you refinance a car loan
If you’re considering refinancing your car loan, it makes sense if:
- You have great credit. The higher your credit score, the lower your potential new interest rate will be and the better your chances of getting the best repayment terms.
- The interest rate is low. For refinancing to make sense, the interest rate must be lower than what you are currently paying. It will also reduce what you pay over the term of the loan and, in some cases, could reduce your monthly car loan payment.
- You meet the eligibility requirements. Not all lenders have the same requirements, so to refinance you must first make sure you qualify. In addition to having a good credit rating, you should also ensure that you meet all other qualifications.
When you shouldn’t refinance a car loan
On the other hand, you may want to avoid refinancing if:
- The new interest rate is higher. If you can’t get an interest rate lower than what you’re currently paying, refinancing isn’t worth it.
- You will soon be making other big purchases. If you’re planning to buy a home in the next few months, refinancing your auto loan triggers another rigorous credit check and increases your debt-to-income ratio (DTI). These things are important to mortgage brokers and underwriters when going through your documents to pre-approve you for a home loan. It is therefore best to avoid refinancing if you plan to take out another loan.
- Your loan is greater than the value of the car. If you can only get a loan for more than the value of the car, refinancing doesn’t make sense.
- You are in arrears. Refinancing makes sense if you’re up to date on your payments. But if you are in default or at risk of default, you may not qualify for refinancing.
Related: What is the average payment for a car?
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Frequently Asked Questions (FAQ)
Will refinancing hurt my credit rating?
Refinancing will trigger a rigorous credit check, which will cause your credit score to drop temporarily. This normally bounces back after a few months of on-time payments.
Should I refinance my car loan?
You should consider refinancing your car if you have good credit, are guaranteed a lower interest rate than you are currently paying, or can get better terms. Also, make sure you qualify for refinancing before you fill out an application.
You might want to skip refinancing, however, if you’re facing a hefty prepayment penalty with your current lender, your credit score hasn’t rebounded from when you took out your last car loan, or you don’t. can’t get a better interest rate.
If you’re planning on taking out another loan soon, like a mortgage, it’s probably best to skip refinancing for now. Refinancing your car loan will temporarily lower your score, causing the interest rate you get on a mortgage to be higher than it otherwise would be.
Can you refinance a car loan with bad credit?
You may qualify for a refinance with bad credit, but that doesn’t mean you’ll get a lower interest rate than you’re currently paying. Try to improve your credit score before refinancing to qualify for the lowest interest rate and best terms for your needs.