If you’re not happy with your current auto loan, you may want to consider refinancing. Refinancing is the process of taking out a new auto loan to pay off your existing auto loan. In other words, the new auto loan will replace your existing auto loan. 

Refinancing can help many borrowers secure more favorable loan terms such as lower interest rates, longer terms, or more affordable monthly payments. However, not everyone can benefit from refinancing. For this reason, it’s important to know if and when you should start the process. When is a good time to refinance an auto loan? Here’s what you need to know:

When Should You Refinance Your Auto Loan?

You may benefit from refinancing your auto loan if:

  • Your Credit Score Has Improved
  • Interest Rates Are Down
  • You Financed Your Loan Through A Dealership
  • You Can’t Afford Your Monthly Payment

Your Credit Score Has Improved

Keep an eye on your credit score. If your credit score has improved since you took out your auto loan, you may now qualify for a lower interest rate. The lower the interest rate, the less you will pay in interest over the course of your loan. By refinancing, you could secure a loan with a lower interest rate, which will save you hundreds or even thousands of dollars.

The interest rate doesn’t need to be dramatically lower for you to save money. Even a slight decrease of 0.5% or 1.0% could lead to significant savings down the road.

Interest Rates Are Down

You should also keep an eye on consumer loan rates. Interest rates on auto loans may drop every time the Federal Reserve takes action to lower consumer loan rates. If rates have dropped since you purchased your car, you may be able to refinance your auto loan at a lower interest rate to save money. You may be able to secure this lower interest rate even if your credit score hasn’t improved since you took out your loan. Remember, even a small change in the interest rate can save you a significant amount of money over the course of your loan.

Refinance An Auto Loan

You Financed Your Loan Through A Dealership

Many people choose to take out an auto loan through the dealership they purchase their car from. Doing this is convenient since it allows consumers to secure financing and purchase a car from the same place. 

However, dealerships typically don’t offer the best rates. If you financed your auto loan through a dealership, refinancing might help you secure a loan with more favorable terms. Request quotes from multiple lenders so you can compare rates and determine whether you can save money from refinancing.

You Can’t Afford Your Monthly Payment

If you’re struggling to make your payment every month, you may want to consider refinancing as soon as possible. Refinancing may help you secure a loan with a lower interest rate, which will make your monthly payments more affordable. 

Even if you don’t qualify for a lower interest rate, you may be able to extend the term of your auto loan by refinancing. The longer the term, the lower the monthly payment. If you’re at risk of defaulting on your auto loan, refinancing might be the solution.

When Shouldn’t You Refinance Your Auto Loan?

Refinancing isn’t right for everyone. It may not be the best time for you to refinance your auto loan if:

  • Your Loan Has Prepayment Penalties
  • Your Credit Score Has Decreased
  • You Have Negative Equity

Your Loan Has Prepayment Penalties

Read your auto loan agreement to see if your loan has a prepayment penalty clause. If it does, refinancing might not be the right answer for you.

A prepayment penalty is a fee that a lender charges when a borrower pays off their loan earlier than expected. For example, if your loan has a six-month term but you pay it off in three months, you may be charged a prepayment penalty.

If your loan has a prepayment penalty, you will need to pay it if you choose to refinance. 

Your Credit Score Has Decreased

Your credit score can impact the interest rate you qualify for when refinancing an auto loan. If your credit score has gone down since you purchased your car, now is not the best time to refinance. 

If you refinance when your credit score has dropped, you may not be able to secure a loan with more favorable terms. In fact, you may only qualify for a loan with a higher interest rate than the one on your existing loan. The higher the interest rate, the more you will pay over the course of the loan. 

You Have Negative Equity

Equity is defined as the difference between your car’s resale value and the amount you still owe on it. If you owe more on your vehicle than it is worth, this means you have negative equity, or in other words, you are underwater on your loan. 

If you’re in this situation, there are several reasons why you should probably wait to refinance your auto loan. First, it’s very difficult to get approved for refinancing when you are underwater on your loan. Even if you are approved, you may only qualify for a loan with a very high interest rate due to your current situation.

What Are the Best Times to Refinance Your Auto Loan?

Timing is everything when it comes to refinancing. Follow these guidelines when determining when you should refinance your auto loan to maximize your benefits:

  • After the First 60 to 90 Days
  • Six Months Into Your Loan
  • Two or More Years Remaining On Your Auto Loan

After the First 60 to 90 Days

It can take between two to three months for your vehicle’s title to transfer to you from the previous owner. Most lenders will not even consider refinancing your auto loan until the transfer is complete.

Waiting for 60 to 90 days can also give you some time to improve your credit score. Your score probably took a slight dip when you purchased your vehicle due to your new auto loan. If you refinance your loan before your score recovers, you may not qualify for the best terms available. 

For these reasons, it’s best to avoid refinancing your auto loan in the first 60 to 90 days after purchasing your vehicle.

Refinance An Auto Loan

Six Months Into Your Loan

Experts recommend waiting at least six months following the purchase of your vehicle to refinance your auto loan. Following this advice will give you plenty of time to improve your credit score before you start the refinancing process. This way, you may be able to qualify for a lower interest rate once the time comes to refinance.

Two or More Years Remaining On Your Auto Loan

When you take out an auto loan, most of the interest on the loan is paid in the first few years. So if you only have a few months left on your auto loan, you won’t benefit much from refinancing. You may still save a little bit by refinancing to secure a lower interest rate, but the potential savings are greatest when you have at least two years remaining on your loan.

Now you have all of the information you need to determine if and when you should refinance your auto loan.