How Soon Can You Refinance Your Car Loan After Purchase
There aren’t specific rules about how soon you can refinance after taking out an initial loan to purchase your vehicle. However, you may at least need to wait until you receive your title showing the original lender as the lienholder. Your credit may have taken a dip after the original loan, too, so it might be helpful to wait a few months for it to rebound.
How Does Refinancing A Car Loan Affect Credit
If youre questioning how does refinancing a car loan affect credit, congratulations! Youve figured out that refinancing your car may save you a significant amount of money. The next question most people want to know is how it will affect their credit score.
The answer will often determine whether or not refinancing is the best option for you. So, lets look more closely at the potential consequences.
How Your Credit Score Affects Your Refinance
Your credit score affects your refinance a lot more than your refinance affects your credit score.
Thats because a higher credit score can lower your mortgage interest rate substantially, whereas a low score typically means paying a higher rate.
As CNBC puts it, As long as your interest rates are high, youre putting less money into equity and assets and more money into servicing debt. And debt has no return on investment.
In short, making smart credit moves and keeping your score up before you refinance can save you a lot of money in the long run.
Just how much can you save when you refinance with a high credit score?
FICO has a page on its website that lets you compare the costs of a mortgage depending on your credit score. We ran a sample scenario using a 30-year, fixed-rate mortgage of $200,000 and average mortgage rates on the day this was written.
Your own results will vary depending on your exact interest rate, loan amount, and location. But the overall trend is clear: your credit score makes a big difference in your refinance costs.
| FICO Score Range |
| $152,471 |
Of course, its not just your mortgage for which youll be paying more.
Your credit score affects interest rates on auto loans, personal loans, credit cards, and other financial products as well.
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When Should I Refinance My Auto Loan
A good rule of thumb is to consider refinancing your auto loan when interest rates have dropped or when your financial situation has improved.
As mentioned above, a lower interest rate can help in a lot of ways. You can free up cash each month with a lower monthly payment, pay off the loan sooner and save on the total amount paid over the life of the loan.
However, many car owners will refinance once their financial situation has improved since their original loan. Maybe your credit score has increased, or you simply did not shop around for the best rate with the first loan.
Whichever circumstance you are in, an auto refinance can have a considerable improvement on your current loan and financial situation.
How Refinancing Affects Your Credit Score
Refinancing might lower your credit score by just a few points, but thats inevitable when shopping for a new loan or credit account.
There are two reasons refinancing affects your FICO score:
Also note that Experian, one of the Big Three credit bureaus, says many credit scoring technologies will continue to consider the payment history on your old mortgage even after you close it.
That can minimize the negative effects of closing your old loan. But be sure your current loan is in good standing when you refinance. More on that below.
For most, refinancing should have few, if any, lasting effects on your credit score.
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Consider Your Reasons For Refinancing
Ask yourself what your goals are for refinancing your mortgage.
Really sit down and think about why you want to refinance your mortgage and what you hope to accomplish, Opperman says. If youre just looking to lower your interest rate, youre probably making the right move, as long as the new loan isnt too expensive upfront.
Under the right circumstances, the long-term gains of refinancing would outweigh any short-term blemishes to your credit.
You Have An Older Car
If you have a car thats 10 years or older, you may have difficulties finding a lender willing to refinance. Many lenders set limits on how old a vehicle can be in order to qualify for the loan. If you find yourself in a situation where you need to refinance, consider taking out a personal loan or trading in the vehicle as alternative options.
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How Does Refinancing An Auto Loan Work
To refinance a car loan, you’ll use a new loan to pay off what’s left on your current car loan, ideally securing yourself a lower interest rate or lower monthly payment in the process.
The process of finding this new loan will go much the same way it did when you initially financed the car, meaning you’ll be able to apply to multiple lenders and compare interest rates and fees to find the loan with the best terms.
Once you accept a loan offer, the refinancing lender sends a payment for the remaining balance on your loan to the lender that originally issued it. The new lender then takes over the lien on the car . You’ll make monthly payments to the refinance lender until you’ve paid off the new loan.
When deciding whether to refinance your car, and which lender to refinance with, you should focus on one or both of these objectives:
What Happens When You Refinance
When you refinance your auto loan, you find a new loan with a better interest rate or term that will pay off your old loan. Once youve signed for the new loan, you pay off that loan instead of your original one. This can be advantageous to you if you can find a new loan with a lower interest rate, or if you need to dramatically reduce your monthly payment. Its best to refinance your auto loan if your credit score has recently improved or if interest rates have dropped considerably.
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How To Prevent Refinancing From Hurting Your Credit
Try to prepare by reading your credit reports closely, making sure there are no errors that could keep your credit application from being approved at the best possible rate. Stay one step ahead of any errors so you still have time to dispute them. As long as you take preventative measures in the refinancing process to save yourself time and money, you shouldnt find yourself struggling with the refinancing.
If refinancing makes sense for your situation, you shouldnt be concerned about it hurting your credit. It might not be the most ideal situation, but its extremely common and typically relatively easy for your credit score to bounce back.
If you notice that your new loan from refinancing causes alarming changes when you check your credit score, be sure to reach out to your creditor or consider filing a dispute. As long as youre prioritizing your overall financial health through smart decision making and budgeting, refinancing shouldnt adversely hurt your credit in the long run.
Decreasing The Average Age Of Your Accounts
Another factor in your credit score is the average age of all of your accounts. This category makes up about 15% of your overall score. The longer the average, the better.
When your new creditor buys out your old loan, the average age of your accounts in your credit report will often decrease, thereby potentially negatively affecting your credit score.
You can calculate it by dividing the number of accounts you have by the total amount of months they have been open. Some credit scoring models will not count closed accounts toward your average, while others may weigh them less heavily than open accounts.
When your new creditor buys out your old loan, the average age of your accounts in your credit report will often decrease, thereby potentially negatively affecting your credit score, says Williams. The impact of the closed loan on this credit score factor will depend on your other loans and their lengths.
The more established your credit history, the smaller the impact. It will take time for the new loan to age and begin to help this credit score factor. But, it will in time.
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Check Your Own Credit Before You Apply
Before applying for a refinance, its a good idea to pull your credit to check whether youd qualify for a new loan. This creates a soft inquiry, which wont impact your credit.
The minimum credit score you need depends on the mortgage program and your loan-to-value ratio, debt-to-income ratio, and cash reserves.
If your credit scores need work, consider hitting the pause button on your mortgage applications. You can work on improving your credit and applying for a refinance loan after a few months.
Refinancing May Be Worth It
Fortunately, refinancing a car loan is easy and straightforward. As long as youre okay with a small, short-term hit to your credit score, this strategy can improve your finances. It may save you money on interest and/or lower your monthly payments.
Unless youre not in a situation where it makes sense, dont allow a temporary credit drop to keep you from refinancing and putting hundreds or even thousands of extra dollars in your pocket. It can be an effective way to improve your financial situation.
Ready to refinance your car loan?
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Make Sure Its The Right Time To Refinance
When interest rates drop, homeowners often consider refinancing to save on their monthly payments. Mortgage experts say refinancing makes sense if you can lower your interest rate by at least 0.75%.
Since youll pay closing costs on a refinance, you should also consider whether youll live in the home long enough to recoup that expense. For instance, if you save $200 a month by refinancing but pay $4,000 in closing costs, it will take 20 months to break even.
How Does Refinancing My Car Loan Affect My Credit
Refinancing your car loan will affect your credit but that doesnt mean you shouldnt consider it.
If you wish your current auto loan was more affordable, refinancing may be a good option. It can allow you to replace your current loan with a new loan and save a lot of money on interest over time. Refinancing may also leave you with lower monthly payments and free up your monthly cash flow.
It may be a good option if your car is retaining value, interest rates are going down, or your has increased. Refinancing may also make sense if youre short on cash flow, want to add or remove a co-borrower, or are worried about repossession.
Before you take the plunge and decide to pursue this strategy, however, its important to consider how refinancing a car loan affects credit. After all, good credit is the key to landing the best interest rates and most favorable terms down the road. You dont want to refinance and later find out that your credit score has taken a large, long-term hit.
2021 Auto Refinance Rates
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Understand The Costs Of Refinancing
Sometimes you can refinance with a lower interest rate, but because the loan is extended, you will actually pay more over the length of the loan. Use a loan calculator to make sure you are saving money overall. Getting the lower monthly rate might be what you are looking for, but if you really want to pay less overall, it is important to do the math.
For example, if you have a $5,000 loan with a 10% interest rate paid throughout two years, you will pay $5,537 in total. However, that same loan extended throughout five years will end up costing you $6,374. Thats $837 that could have been spent on something else. So make sure you extend your loan only if you need to do so.
Freeing up cash quickly is sometimes the only reason for refinancing a car loan. Beware of higher interest rates, though, because most lenders charge higher rates on older vehicles. When you’re looking to refinance your aging car, you might be surprised at the interest rate available to you compared to what you received when the car was new or almost new.
Many banks, including USAA Bank and Bank of America, do not charge an application fee for an auto loan refinancing.
Refinancing Your Auto Loan
Refinancing a car loan may be worthwhile if interest rates have dropped or your credit score has improved since you took out the loan. You might also want to refinance your car loan if you simply need to reduce your monthly expenses.
Refinancing for a longer-term auto loan will lower your monthly payments, but depending on how long you stretch out the loan, it could increase the total amount you pay for the car. Make sure that the new interest rate is low enough that it doesn’t drastically increase your total cost. To refinance, you’ll need a car that has held its value; generally, the car must be worth more than what you still owe on it for lenders to consider refinancing.
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When To Refinance A Car
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Figuring out if and when you should refinance a car can be tricky, but if you approach it the right way , youll be able to make the right choice. You should refinance a car when it could help you save money, get you a lower payment or both. You should probably skip refinancing if youre underwater on your current loan, youve bought the car recently or your current loan has prepayment penalties.
Heres more on when to refinance a car and when to wait.
Can You Refinance An Auto Loan With Bad Credit
If your credit scores have dropped significantly since you took out your original car loan, it may be difficult to find refinancing that saves you money because lenders typically charge higher interest rates to applicants with lower credit scores. If your refinancing goal is lower monthly payments, however, you may be able to find an auto lender that specializes in borrowers with less-than-ideal credit. You may qualify for a new loan with a longer repayment period that’ll cost more over time than the original loan did, but the extra expense could be worth it if it means you can pay today’s bills more easily.
If you’re at risk of missing a payment on your original car loan and having difficulty finding refinancing options, reach out to your lender as quickly as possible to explain the situation. While they are not obligated to do so, some lenders will work with you and may even modify your original loan terms to give you lower paymentsin exchange for a higher interest rate and potential fees.
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Lower Your Monthly Payment
Sometimes, an expensive occurrence such as having a baby, unexpected medical bills, or a natural disaster can put you in a situation where you have to reduce your monthly expenses. Refinancing might allow you to extend the duration of your loan, thereby lowering your monthly payments. For instance, if you owe two more years on your current loan, it may be possible to refinance and extend the term to four years.
Adding two years onto your loan should substantially lower your monthly payment, depending on the interest rate you get. You will be paying for two years more, but you will free up some cash on a monthly basis, helping you get through a rough patch. Keep in mind, though, that this will also mean that you’ll pay more interest over the total life of the loan.
Changing lenders can be a pro or a con, depending on the relationship you have with your current lender. If your lender has poor customer service, changing lenders could be a benefit. If you like your lender, you can try to refinance with them, but you may need to look elsewhere to get the best rate.
