When Is the Best Time to Refinance Your Car?

Car refinancing involves replacing your existing auto loan with a new one. This process allows a borrower to obtain new terms for their vehicle financing, which can include a different interest rate, a revised monthly payment, or an adjusted repayment period. The purpose of refinancing is to improve a borrower’s financial standing concerning their vehicle.

When to Consider Refinancing Your Car

A borrower might consider refinancing if their credit score has significantly improved since securing the original loan. A higher score, perhaps moving from the mid-600s to the 700s or 800s, signals reduced risk to lenders. This improved credit profile can qualify the borrower for a lower annual percentage rate (APR), leading to substantial interest savings over the life of the loan.

Economic shifts can also lead to a decline in prevailing auto loan interest rates. If current market rates are notably lower than the rate on an existing loan, refinancing allows borrowers to take advantage of these improved conditions. Even a percentage point or two difference in the interest rate can translate into meaningful savings on the total interest paid.

Some individuals seek to reduce their monthly financial obligations, and extending the loan term can achieve this. For instance, lengthening a loan from 48 months to 72 months can lower the amount due each month, providing immediate budget relief. While this strategy frees up cash flow, it means paying more in total interest over the longer repayment period.

Conversely, if a borrower’s financial situation has improved, they might opt for a shorter loan term. This choice increases the monthly payment but significantly reduces the total interest paid over the life of the loan. Shortening a 60-month loan to 48 months, for example, can lead to thousands of dollars in interest savings.

An individual who initially required a co-signer due to limited credit history or income might now have established a stronger financial profile. Refinancing allows the primary borrower to reapply for the loan solely in their name. This action releases the co-signer from their financial obligation and removes the loan’s impact on their credit report.

Certain refinancing options permit borrowers to borrow more than their outstanding loan balance, utilizing the vehicle’s equity. The new loan amount exceeds the current payoff, with the difference paid out as cash to the borrower. This cash can be used for various purposes, such as consolidating other debts or covering unexpected expenses, but it increases the total debt secured by the vehicle.

Key Factors to Evaluate

The primary evaluation involves comparing the existing loan’s annual percentage rate (APR) with potential new offers. A difference of at least 1% to 2% in the APR is a good threshold for potential savings. Borrowers should calculate the total interest paid on both the current loan and the potential new loan to understand the true financial benefit.

Refinancing is more impactful when a substantial balance remains on the original loan. If only a few payments are left, or the balance is low, the administrative fees associated with refinancing might outweigh any interest savings. Evaluating the remaining principal amount, such as if it is above $5,000 to $10,000, can indicate a more worthwhile endeavor.

Lenders assess the vehicle’s market value using resources like Kelley Blue Book or Edmunds to determine its loan-to-value (LTV) ratio. If the outstanding loan balance is significantly higher than the car’s market value, known as being “underwater,” lenders may be hesitant to approve a refinance. A healthy LTV, below 120% to 125%, is preferred. The age of the vehicle also matters, as some lenders have restrictions on refinancing older models, such as those over 7 to 10 years old.

Several fees can diminish the benefits of refinancing. These might include application fees ($0 to $50), origination fees (1% to 3% of the loan amount), and title transfer fees ($50 to $150). Some existing loans might also have early payoff penalties, which can be a flat fee or a percentage of the remaining balance (1% to 2%). All these costs must be factored into the savings calculation.

While a lower monthly payment is appealing, extending the loan term can result in paying more interest over the loan’s life. For example, reducing a monthly payment by $50 over an additional 12 months could add hundreds or thousands of dollars in total interest. Online auto loan calculators are valuable tools for comparing total interest paid across different scenarios.

A borrower’s current credit score directly influences the interest rates offered. A FICO score above 670 qualifies for better rates, with scores above 740 securing the best terms. Lenders also review the debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. A DTI below 43% is favorable, indicating the borrower can manage additional debt without undue strain.

The Refinancing Application Process

Before applying, assemble necessary paperwork. This includes:
A valid driver’s license.
Proof of income, such as recent pay stubs or tax returns.
Current auto loan statements detailing the payoff amount and account number.
Vehicle information, including the make, model, year, and Vehicle Identification Number (VIN).
Having these ready streamlines the application process.

Different financial institutions offer varying rates and terms. Compare offers from various sources, including traditional banks, credit unions, and online lenders specializing in auto refinancing. Credit unions provide competitive rates due to their member-focused structure, while online lenders offer quicker application processes.

Once a few potential lenders are identified, submit applications. This can be done online through secure portals or in person at a branch. The application will request personal, financial, and vehicle details. Some lenders perform a “soft” credit inquiry initially, which does not impact the credit score, before a “hard” inquiry for final approval.

Upon receiving offers, carefully examine each one. Compare:
The proposed annual percentage rate (APR).
The new loan term.
The resulting monthly payment.
Any associated fees, such as origination or documentation fees.
Ensure the terms align with the refinancing goals, whether to lower the monthly payment or reduce total interest.

Once an offer is accepted, the new lender will provide loan documents for signature. These documents formalize the new agreement. After the new loan is finalized, the new lender will disburse funds directly to the original lender to pay off the existing auto loan. This transfer of funds completes the financial aspect of the refinance.

After the old loan is paid off, the borrower will begin making payments to the new lender according to the new schedule. The vehicle’s title, which previously listed the old lender as the lienholder, will be updated to reflect the new lender. This process takes a few weeks, and the new lender will provide instructions regarding payment methods and access to account information.