How Soon Can You Refinance a Car Loan After Purchase?

You’ve taken out a loan to buy a new or used car and you discover that your interest rate is higher than it should be. Or maybe you found that you can’t afford your monthly payments. You might be able to save some serious bucks by refinancing your loan at a lower rate.

Many lenders won’t let you refinance in the first six months after you take out a new loan. But once that period has passed, you can go shopping and snag yourself a better deal. Here’s how the process works and how soon you can refinance a car loan after purchase.

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When can you refinance an auto loan?

An auto loan refinance is simply an exchange of one loan for another — the second loan is used to repay the first. Most borrowers who refinance do so to secure a lower interest rate or longer loan term. When done properly, you can end up saving hundreds or even thousands of dollars in interest over the period of your loan. Here’s how refinancing differs depending on the age of your loan.

Within the first 3 months

Regardless of the official terms of your loan, you simply can’t refinance until the title for your vehicle has been processed and ownership has been transferred to your new lender. This process typically takes at least two or three months.

Something else to consider is that your credit score likely took a hit from applying for the new loan and adding a sizable new debt to your credit report. If you’re looking to refinance into a lower rate, you might want to give your score a little time to recover so you can qualify for the best terms possible.

At least 6 months into the loan term

Six months is normally enough time to regain some of the credit score points you lost when you applied for your auto loan. Remember that you’ll likely lose them again, at least temporarily, if you refinance. That small dip in your credit score is a small price to pay if you can secure a lower rate and save money. Use an auto refinance calculator to estimate your savings.

If you’re able to wait at least six months before refinancing your car loan, it’s likely that the lending market has changed. If rates have fallen since you took out your original loan, you may be able to capitalize on the reduced rates and save money in interest. Refinancing your loan sooner rather than later gives you time to save even more in interest costs over the life of the loan.

Two years left on the loan

Once you cross the halfway point of your auto loan, you’re unlikely to save much money through refinancing. Since you pay the bulk of your loan’s interest toward the beginning of your repayment term, the potential savings from refinancing decreases every day you hold the loan. This doesn’t mean you can’t still refinance, but the savings you gain may not be enough to offset the cost.

As your loan ages, your car is getting older as well, and its value is depreciating. Lenders have specific requirements regarding the age and mileage of cars they’re willing to refinance, and some lenders won’t refinance a loan that’s too close to the end of its term. Generally, if your car is older or has high mileage, lenders may offer you a higher interest rate, if they offer refinancing at all.

When should you refinance an auto loan?

It doesn’t make sense to refinance an auto loan unless you qualify for better terms. There are two primary ways to qualify for a lower interest rate: through an improvement in your credit score or if market rates have dropped since you took out your original loan.

If your credit score has improved since you took out your original loan, you may qualify for a better rate, even if market rates have risen overall. Poor credit scores can translate to auto loan rates of 10% or more, while borrowers with top-tier credit can score rates closer to 5%. This can result in significant savings if you qualify.

Interest rates are changing all the time, and it’s entirely possible that you’ll be able to find a lower rate after a year of paying on your loan. If you got stuck with an above-market rate, you may be able to refinance relatively quickly by shopping around with various lenders.

If you can’t afford your existing loan and plan to extend your repayment term, think twice before refinancing. While you may lower your monthly auto loan payments, the total cost of your loan will end up being even higher.

What to consider before refinancing your auto loan

At the end of the day, whether you should refinance depends on the numbers. If refinancing your auto loan can save you money, it’s probably a smart idea. Here are the most important variables you need to consider to avoid car refinancing mistakes:

• Total savings: When deciding whether it’s the right time to refinance your car loan, your focus should be whether it will cost more to refinance than you will save. If the savings are worth the effort, it may be a good idea.
• Credit score: The higher your credit score, the lower the interest rate you’ll pay. Check to see if your score has improved since you took out your original loan — if it has, you may be able to score a lower rate. If your credit needs work, you should wait to refinance until you’re able to improve your score.
• Repayment term: If you’re close to the end of your original loan, refinancing might not be worth the hassle or the dip in your credit score. Since you’ve already paid the bulk of your interest — and your loan doesn’t have many payments left — refinancing late in your loan may not be beneficial.
• Minimum loan amount: If your car is older or has plummeted in value, you might not meet a lender’s requirement for a minimum loan amount. This minimum is often $10,000, but be sure to check with your lender to find out whether your car meets the requirements to qualify for refinancing.
• Age of your car: The older your car gets, the less likely you are to find a lender willing to refinance it, particularly at favorable terms. This is another reason to try to refinance during the first half of your auto loan, when age and mileage are still low.
• Prepayment penalty: Lenders expect to make a certain amount of money in interest in exchange for financing your car purchase. If you pay off your car loan early, the lender isn’t able to make as much profit as expected. To combat this, some lenders add a prepayment penalty to their auto loans — a fee the borrower has to pay when repaying the loan in full before the end of the repayment period. If your loan has a prepayment penalty, it may eat into any potential savings you’ll see from refinancing.