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How Soon Can You Refinance a Car Loan?

You’ve taken out a loan to buy a new or used car and you suddenly discover that you’re paying an interest rate that is much higher than it should be. Or maybe you found that you can’t afford the monthly payments.

One option may be to refinance the loan at a lower rate and, if need be, for a longer term, which could save you money and reduce the amount of your payment, though it may add to your debt load by extending the length of your loan. Refinancing is possible even with a new loan, although there are special factors to consider.  

Understanding refinancing your car

Refinancing a car loan is like refinancing a mortgage, although it’s much easier and faster. And none of the lenders we checked charge fees, although you may need to pay a small title transfer fee imposed by your state Department of Motor Vehicles. Essentially, refinancing a new car means that you take out a new loan to pay off the old one. The new loan can be for the remaining duration of the old one or even shorter, though in most cases, it will extend the length of time you’ll need to pay off your loan. Know that taking on a longer loan could reduce or even eliminate any savings you might get from refinancing. Depending on the rate, term and the amount you still owe, refinancing could save you a lot of money.

One thing to keep in mind, according to Michael Saccucci, the director of statistics and data science at Consumer Reports, is that the earlier you refinance, the more you could save if you get a significant reduction in interest rates.

For example, suppose you were just five months into a 72-month, $32,000 new car loan at 6.6%. If you financed the remaining $30,162 at 3.39 percent for the remaining 67 months of the original loan, you’d save about $3,000, said Saccucci.

When does it make sense to refinance your car loan early?

Here’s why refinancing early can make sense:

You got a bad deal on your current loan

This can happen if you financed through a dealership without doing your due diligence. Dealership financing typically comes from banks, independent lenders and captive financial arms — or those that are owned by the car manufacturer. But sometimes dealers don’t quote those lenders’ best rates and instead quietly mark them up to pad their profits, says Daniel Blinn, managing attorney of the Connecticut-based Consumer Law Group. The best course is to avoid this in the first place by carefully comparing rates and negotiating a better rate or financing elsewhere. “Consumers who have their financing in place before they visit a dealership will be in a much stronger position to negotiate the best possible deal,” said Blinn.

Your credit score has improved

Even within the first 12 months or so, your credit score may have improved enough to make you eligible for a significantly lower rate. Perhaps you corrected a mistake on your credit report or paid off most of your outstanding debt. Maybe you’ve demonstrated that you’re responsible by paying all of your bills on time, or you’ve had a big increase in income. Whatever the reason, an improved credit score can make getting a better loan deal far easier.

You’ve developed a relationship with a lender

Some institutions offer low rates for their good customers. And some have special deals to bring new customers in. For relatively new vehicles, some lenders will refinance your existing loan at their attractive new car rate. These rates can be better than what you initially took on when you first applied for the car loan. It pays to continually evaluate your loan and your payments to be sure that you are getting the best rate possible.

You can’t afford your car loan payments.

Maybe you’ve lost your job. Or perhaps you overestimated your ability to pay. Usually when refinancing, you’ll have 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 that will also eat up some or even all of the savings from refinancing. As a last resort, you also could consider a 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 vehicle’s value, if higher. But such borrowing is extremely risky, especially since you’re already in a financial crisis.

What are the drawbacks of refinancing a car loan early?

It’s still important to know that refinancing in the early months of a car loan, or in some cases, at any time, can be a bit tricky. Here’s why:

You may not qualify

Banks generally don’t like refinancing a loan if you owe more than what your vehicle is worth. That can happen if your car has lost value faster than you’ve been paying it off. This is most likely to occur early in the loan, especially if you took a long-term loan and made a small down payment, usually less than 10% when you bought the vehicle. Even then, a lender might agree to refinance if you first pay the difference between the amount you owe and the vehicle’s current value. 

You already have the best rate

If you purchased your car new, you likely got an attractive new car rate, especially if you took advantage of a special interest offer, which can feature rates as low as 0%. The refinancing rates for some lenders, among them Bank of America, are higher than even their used-car rates, even if your vehicle isn’t even a year old. Also, interest rates have been fairly low in recent years, and while a rate drop may be on the horizon, that alone may not be enough to justify a refinancing if your goal is to save a significant amount of money.

You may not qualify for a top rate

If it has only been a short time since you got your initial loan, your credit score still may be suffering from the temporary hit as a result of a “hard inquiry” to your credit report, especially if you’ve also applied for other types of credit, such as a mortgage or one or more credit cards. However, just shopping for car loans should have a minimal effect on your score, reducing it by fewer than five points for about 12 months, says Dave Shellenberger, vice president of scores and predictive analytics at FICO. Your refinancing rate also may be affected if you’ve missed or were late on your loan payments, or if you haven’t had the loan long enough to demonstrate that you’ll consistently pay on time, especially if you don’t have a long credit history.

You may have to pay a penalty

Most car loans have prepayment penalties or other fees that you’ll incur if you pay off your loan early and to go to another lender. And that may determine whether it’s worth refinancing, says Ryan Mohr, owner of Clarity Capital Management, a Oregon-based fee-only planning and investment firm.

The only way to determine how all of these factors will affect your decision to refinance is to do your homework. No matter how new your loan is, periodically check refinancing offers, especially if interest rates are declining or your credit rating, income or other circumstances have changed.

Figure out your current loan

Start by determining the rate on your existing loan and finding out how much you still owe. It’s also wise to get your current credit score so you’ll have some idea about whether you’d qualify for lenders’ advertised top rates. Don’t forget to check for special deals. and to find. And remember that if you have a late-model vehicle, you may be eligible to refinance at a lender’s new car rate, instead of higher used car or general refinancing rates. So check that, too.

Determine if you qualify for refinancing

Find out whether you’d meet a lender’s requirement for a refinancing. Capital One, for example, won’t 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 won’t refinance a loan that it issued in the first place. (Bank of America is an example of a lender that will.)

Calculate your savings

Use an auto refinance calculator to estimate how much you’d save. You’ll need to know the remaining loan balance, monthly payment and interest rate for your current loan. You’ll also need to enter the amount you’ll want to refinance, which often is the remaining balance, as well as the number of months you want the loan to last and your expected interest rate. Keep in mind that the results are only estimates.

Contact lenders

The only way to know for sure whether you’d qualify to refinance and at what interest rate, term and amount you’d be charged, is to contact lenders. You can apply online, but it’s probably best to talk to someone to review your situation if there are any special considerations. You can check out our list of the best automotive refinancing companies, here.

Do the math

Your focus should be on saving money by looking for a lower rate and a new loan that ends no later than the original one. (Keep in mind that some lenders, such as USAA and Stamford Federal Credit, will let you refinance for just the remainder of your original loan term. Others, including Bank of America, will require you to pick standard-term refinancing period, for instance, 36, 48, 60 or 72 months. Of course, when making a decision about which term to choose, you’ll need at least a general idea of your income and expenses so you can make sure the payments will fit into your budget.

If you must extend the loan beyond the original end date, keep it as short as possible and try to make additional payments along the way, advises Saccucci. (In the $30,000 loan example above, extending the loan by 12 months would reduce your savings by more than $500.) Once your finances improve, you can refinance again.

Finally, avoid cash-out refinancing unless absolutely necessary, for example to pay for an emergency medical expense. You could be putting your vehicle at high risk for repossession, which only will make your financial situation worse. “I can’t think of too many scenarios in which that’s a good idea,” said Mohr of Clarity Capital Management.

The bottom line

No matter how new your car loan, consider refinancing if the interest rate you’re paying is too high or if your financial situation has changed. But if you want to save as much as possible, don’t extend the loan beyond the original term. Consider a risky cash-out refinancing only as a last resort.

The information in this article is accurate as of the date of publishing. 

 

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