How Long Should You Wait To Refinance Your Car Loan If Your Rate Is High
The back office of the car dealership is the wrong place to get an auto loan: car dealers charge over $1,700 on average in undisclosed markups and fees! Lets say you already got your loan, though how soon can you refinance your car loan online to reduce your auto interest rate or lower your monthly car payments?
Learn more about markups and see how much you might have paid with our Outside Financial Markup Index.
The short answer? You can refinance your car loan at any time during the life of the loan, and the sooner you refi, the sooner you start saving.
Theres no minimum or maximum amount of time you need to wait before refinancing. You dont even have to make the first payment to your existing lender. . The sooner you refinance to a better loan, the sooner you start saving. Refinancing a loan secured by a newer car usually means youll get a better interest rate too auto interest rates on newer cars are typically lower than for older cars. Many lenders also have a cut-off for vehicles over a certain age or for those that have driven over a certain number of miles.
Shop Around For The Best Refinancing Rates
All lenders weigh your credit score, financial history and eligibility differently. If you decide to refinance, start with the bank or credit union you use for other services. Some financial institutions offer discounts on interest rates for existing customers. Then compare the rate offered by your current bank with rates from other lenders to get a clear view of what top lenders are offering.
When you are ready, get prequalified with at least three lenders. It only counts as one inquiry on your credit report if you apply to multiple lenders within two weeks, and with multiple preapproval offers, you can see which option is the best for your financial goals.
The bottom line: Interest rates vary widely, so compare a few lenders before deciding. Shop around but be sure to check your current financial institution since there may be discounts for current customers.
Why Should You Refinance Your Car
There are several reasons why you may want to consider refinancing your car. Heres a breakdown:
- Your credit score has improved since you purchased your vehicle or refinanced into the current loan, and you qualify for a lower interest rate.
- You want to reduce your auto loan payment and dont mind paying additional interest over the life of the loan.
- You want to get a lower rate and make more than the minimum payment to pay off the loan early and save on interest.
- Your cars resale value is either equal to or greater than what you currently owe on your loan.
- Your current lender does not charge prepayment penalties.
- Average auto loan rates have dropped, and you believe you could get a better deal by refinancing your existing car loan.
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Factors To Consider Before Refinancing
Lender requirements, additional fees and your finances should all be considered before you refinance your vehicle.
- Requirements for refinancing: Every bank or lender has its own criteria to determine if you are eligible for refinancing. Be sure that you are not upside-down on your loan and are current on payments.
- Prepayment penalties: A prepayment penalty is the fee that you must pay if you pay off your loan early. Not all lenders charge this, but it could affect your overall savings.
- Time remaining on the loan: If you are near the end of your current loan, it may make more sense to finish paying it off instead of sinking time and money into refinancing.
- Your financial state: Your debt-to-income ratio is one of the many factors considered by lenders. The more debt you are able to pay off before applying for a new loan, the better terms you receive will be.
Does Refinancing Your Car Hurt Your Credit
If you are wondering if refinancing your car loan will hurt your credit score, first you need to understand the stages and how each will impact your credit.
Many lenders offer an online tool to get a rate quote without hurting your credit score. Consider leveraging this resource to gauge your approval odds and determine if refinancing makes sense for you.
If youre pre-approved and decide to apply for a loan, a hard inquiry will be generated and could drop your credit score by a few points. But suppose you shop around with several lenders within a short span. In that case, all inquiries will be grouped together to minimize the impact on your credit score.
When you open a new car loan, your credit score could also take a hit as the average age of your credit accounts will likely decrease. The upside is, with timely payments and sound debt-management practices over time, refinancing can actually improve your score in the long term.
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What Does Auto Refinancing Mean
First, auto refinancing entails swapping your current loan with a new one with different terms. As a result, youll likely get a different interest rate and new loan term. Upon approval, the new lender will pay off your old loan, and youll resume payments on the new loan.
Depending on the change in your rate, you could save money in interest if your credit score has improved. But you could also pay more over the new loan term if youve been paying on the car for a while, as the lender will have even more time to collect interest from you. Still, the more affordable monthly payment on the new loan could make refinancing your auto loan a worthwhile maneuver.
You Cant Afford Your Car Loan Payments
Refinancing typically offers the option of extending the loan beyond the original ending date. That, along with any reduction in your rate, can reduce your monthly payments. But a longer term will also eat up some or even all of the savings from a lower refinancing APR. As a last resort, you also could consider cash-out refinancing, in which a lender will refinance your loan and give you cash up to and in some cases more than the difference between the amount you owe and the vehicles value, if higher. But such borrowing is extremely risky, especially since youre already in a pinch.
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How Does Refinancing Your Car Work
The auto loan refinancing process is straightforward, once you understand how refinancing works. When you refinance your car, you replace your original car loan with new loan terms. You use the money from the new loan to pay the remaining balance on your first loan. Then, you start making payments on the new loan.
In most cases, you can get approved for an auto refinancing loan online in minutes. If you decide to accept the loan terms, youll undergo a hard credit inquiry before signing some legal documents. Then, your lender will pay off your original loan, update your title, and begin collecting your monthly payments.
Mistakes To Avoid When Refinancing Your Car
You want to avoid these mistakes when refinancing your vehicle:
- Getting a new auto loan when your current lender charges prepayment penalties if you pay off your loan early
- Accepting an extended loan term that drastically reduces your car payment but costs you a fortune in interest over the loan term and puts you upside down in the loan
- Securing a loan with more favorable terms too close to the end of your repayment period on your current loan
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Youre Having Trouble Making Payments
If youre having a hard time keeping up with your monthly expenses, refinancing your car loan could help. You dont have to wait for a dramatic drop in interest rates to save on your auto loan, either. All it takes is a slight decrease to help you save more money every month by lowering your monthly car payment and reducing the amount you pay into your annual percentage rate .
Pro tip: Keep an eye out for potential rate changes and take some time to shop around before making a loan decision. You can often get a better offer by comparing rates from multiple lenders.
So Is It Smart To Refinance Your Car It Depends On The Circumstancesand Your Lender
After youve given refinancing some thought and evaluated your own personal financial situation, you may be ready to take the next steps toward car refinancing. Just make sure you find a lender that works for you before getting started.
For example, online lending platforms like Upstart look beyond your credit score to determine your rate. That means you could get an affordable refinancing loan without a stellar credit score. As a result, you could pay less for your loan over time. You may even be able to pay off your car sooner than you thought. Hows that for a win-win?
¹Neither Upstart nor its bank partners have a minimum educational attainment requirement in order to be eligible for a loan.
Car refinance loans not available in IA, MD, NV, or WV. Car refinance loans in IL and MO are originated by Cross River Bank or Midwest BankCentre. Car refinance loans in CO, KS, and TX are originated by Cross River Bank or Rising Bank, Member FDIC. Car refinance loans in FL, GA, and AL are originated by Cross River Bank or Drummond Bank, Member FDIC. All other car refinance loans are originated by Cross River Bank, Member FDIC.
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Decide If Refinancing Is The Right Financial Move
There are two main reasons to refinance: if you can get a better rate or if you are struggling to make payments.
The first scenario is common if you took out your auto loan when interest rates were high or when you had a low credit score. If your since you got your loan, lenders will likely offer you better terms, which will help you save money over time.
On the other hand, if you feel like you are stretching your monthly budget with your current payment, you can refinance your car loan to a longer term. By extending your repayment term, your monthly payments will decrease but you will likely pay more in interest over time.
The bottom line: The key to knowing if refinancing your vehicle is the right choice is whether you will save money. If you cant get a lower interest rate through refinancing, it is not a great idea. Refinancing to a higher interest rate will make your loan more expensive even if your payments are lower each month.
Refinancing Your Auto Loan
When you refinance a car loan, youre replacing your current auto loan with a new one with terms that are more favorable to you.
Your new loan may have a lower interest rate, lower monthly payments or a longer or shorter loan term.
The balance of your former car loan is paid off with your new loan, and you begin to make payments to your new lender until that loan is paid off.
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Who Shouldnt Refinance A Car
So far, weve talked a lot about who should refinance their cars. As a general rule of thumb, if youve owned your car for at least six months, made regular payments, and think you could get a better deal, refinancing could work for you.
There is a flip side, though. We mentioned that refinancing isnt for everybody, and thats especially true if youve already repaid most of your loan. If youre down to your final payments, its probably best to stick with your existing loan.
In another scenario, if your car is older or has a lot of miles on it, youre less likely to get approved for a refinancing loan. Some lenders wont consider refinancing a car loan if the vehicle is over 10 years old. Others have a mileage cap, which means the lender wont approve your loan if youve put more than 100,000 miles on your car. Upstart, however, offers refinancing on cars with up to 140,000 miles.
Its always a good idea to consider the potential fees youd face if you refinance your car, too. Some loans come with prepayment penalties, or charges for repaying a loan early, that could counteract any potential savings. The same goes for loans with precomputed interest, or interest thats calculated when you take out your loan instead of as you make payments.
Best Refinance Rates: Openroad Lending
- Minimum credit score: Not stated
- Loan terms : Up to 72 months
OpenRoad Lending offers auto refinance loans with extremely low rates. While they dont disclose their full range of interest rates online, qualified borrowers can expect to receive quotes for competitive rates.
Minimum refinance amount of $7,500 in most states
Refinance restrictions on vehicle mileage, age, and brand
OpenRoad Lending specializes in auto refinancing, offering traditional and cash-back refinancing options and a wide range of loan terms. Borrowers with excellent credit can refinance into some of the lowest rates available. In addition, it provides financing options for individuals across the credit spectrum.
- : Said to be very low, apply to see them
- Minimum loan amount: $7,500 in most states
- Repayment terms: Up to 72 months
- Recommended credit score: Not disclosed
- Availability: Nationwide
Founded in 2009, OpenRoad Lending specializes in auto refinance loans and offers a range of car-related financial products. Rates for refinancing are said to be very low, but you must apply to see them. OpenRoad Lending says that its customers tend to save $100 per month or more with their new lower payments.
Its traditional refinance product is open to borrowers of a range of credit ratings. There’s also a cash-back refinancing option, which allows borrowers to get cash out by refinancing their vehicle.
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How Much Should You Put Down On A $12000 Car
A typical down payment is usually between 10% and 20% of the total price. On a $12,000 car loan, that would be between $1,200 and $2,400. When it comes to the down payment, the more you put down, the better off you will be in the long run because this reduces the amount you will pay for the car in the end.
When You Should Refinance An Auto Loan
If youre thinking about 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 more likely you are to qualify for the best repayment terms.
- The interest rate is low. For refinancing to make sense, the interest rate should be lower than what youre paying now. This will also lower what you pay over the life of the loan and, in some cases, might reduce your monthly auto loan payment.
- You meet eligibility requirements. Not all lenders have the same requirements, so to refinance, you should make sure youre eligible first. In addition to having a good credit score, you should also make sure you meet any other qualifications.
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Is Refinancing Worth It
If youre simply refinancing, and you know youll get a better rate and save yourself some money, its really a no-brainer. If, however, youre not sure youll save any money, use this auto refinance calculator to estimate your savings and decide if it makes good financial sense to refinance.
In many cases, people refinance because they need to lower their monthly payment, usually due to some unforeseen financial crisis. Finding balance between your immediate financial needs and long-term financial health is never easy but if you do the math and plan accordingly, you can make the right financial decision for you and your family.
If refinancing your vehicle is necessary to improve your cash flow, you may refinance now to get back into a positive financial situation. Once your personal finances have stabilized, start making extra payments on your auto loan to pay it down faster, provided that there arent prepayment penalties on your new loan. Youll pay off your auto loan sooner and save yourself some interest expense.
Your Current Loan Has Prepayment Penalties
Paying your loan off early is one of the best ways to reduce how much you pay in interest unless your loan comes with prepayment penalties. Financial institutions sometimes attach these penalties to loans to make up for the interest they lose when borrowers repay their debts in full before their loan terms end. Prepayment penalties can easily cost as much as or more than youd save when you refinance your auto loan.
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Determine If You Qualify For Refinancing
Find out whether youd meet a lenders requirement for a refinancing. Capital One, for example, wont refinance loans for cars that are more than seven years old, and the payoff amount on your current loan must be between $7,500 and $50,000. Like many lenders, it also wont refinance a loan that it issued in the first place.
What Do Lenders Look At When Determining Your Eligibility To Refinance
Lenders will want to look at the following factors when deciding whether or not to approve your car loan refinance application:
- Credit score is an indicator of how risky you are as a borrower. The riskier you are, the higher your interest rate.
- Lenders will want to know how well youve managed your bill payments in the past.
- Employment. Youll have to provide details about your employer, job title, income and number of months in employment.
- Existing debts. Youll have to list your existing monthly debts.
- Debt-to-income ratio. Lenders will use your income and debt details to calculate your DTI. Ideally, you want a DTI below 40% to 43%.