If you want to refinance your car loan, you can typically do so as soon as the car title has been transferred to your name—a process that generally takes 60 to 90 days. But while you may be able to refinance early in the loan term, it is often better to wait six months to a year. Here's how to know when (and whether) refinancing might make sense for you.
Key Takeaways
- Typically, there is no set waiting period for refinancing a car loan once you have received the car's title, which usually takes about 60-90 days.
- Early refinancing may be possible, depending on the lender's policies, the loan-to-value ratio, and your financial situation.
- Waiting a while to refinance can have benefits, such as establishing a positive history of payments and improving your credit score.
Factors to Consider Before Refinancing
Refinancing a car loan can sometimes get you a better interest rate and lower your monthly payments. But before you apply, you'll want to consider some important factors, such as:
- Interest rates. What do current interest rates look like? If they are lower than when you initially took out the loan, you may be able save money by refinancing, as long as you qualify for that better rate.
- Loan term. How will changing your loan's term (or length) impact your payments? Extending your loan term can lower your monthly payments but increase how much you pay overall. Refinancing to a shorter term with a better interest rate could reduce how much you spend in total.
- Credit score. What is your current credit score? If it has improved, it could help you get a better interest rate when refinancing. If your score has decreased, refinancing may be more challenging. You can obtain your credit score for free from many banks and credit card companies, as well as online sources.
- Financial situation. What is your current financial situation? Better credit scores and an improved debt-to-income ratio could help you refinance your loan with a better interest rate.
When You Should Refinance an Auto Loan
Interest rates are lower than when you first secured the loan
You want to work with a new lender
You have a strong and improved credit score
You meet the lender's requirements for refinancing at a lower rate
When You Shouldn't Refinance an Auto Loan
Your loan has penalties for refinancing that would outweigh any savings
Refinancing would significantly extend your loan term
Your credit score hasn't improved or has dropped
Waiting Period for Refinancing
While there is no universal waiting period for refinancing, most lenders will have a minimum waiting period. In most cases, you will need to wait 60 to 90 days before refinancing.
Benefits of Waiting to Refinance
Waiting to refinance your auto loan can have benefits, including:
- Establishing a payment history. Establishing a track record of on-time payments can help you secure a better interest rate if you decide to refinance later.
- Improving your credit score. Making on-time payments on your loan will be reflected on your credit reports and have a positive impact on your credit score over time.
- Obtaining better loan terms. Waiting longer to refinance not only gives you time to improve your financial situation but also allows more time for auto loan interest rates to drop.
Note
Your credit score may initially drop after you get a car loan, due to the lender's hard inquiry on your credit file and the additional debt you are taking on. But making on-time loan payments will improve your score over time.
Considerations for Early Refinancing
Different lenders may have different refinancing rules. In many cases, a waiting period will be one of those. Even if a lender allows immediate or early refinancing, there are other factors to consider, such as:
- Your financial position. Has your credit score or income changed significantly since you first secured the loan? If either has increased, you could potentially get a better interest rate.
- The age and condition of your car. If the value of the car is too low, lenders may not be willing to refinance your loan.
- Potential fees. Some lenders charge fees when refinancing a loan. Consider how much these fees will cost in total and whether they may negate the benefits of refinancing.
- Loan-to-value ratio. The loan-to-value ratio compares the amount of money you are borrowing to what your car is worth. Lenders will use this ratio when determining the terms for your refinanced loan.
Steps to Refinance a Car Loan
What do you need to do to refinance your car loan?
Collect the Necessary Documents
You will need to gather documents that verify your identity and home address. You will also need evidence of your employment status and income.
Your new lender will also likely request:
- Payoff details on your original loan
- Your car's registration
- Proof of insurance
Research Lenders
Most lenders do not refinance their own loans. So, you will likely need to research different lenders. Choose a few and request refinancing quotes. In many cases, you can pre-qualify for a loan, which involves a soft credit check and doesn't affect your credit score.
Compare Offers
Comparing several loan refinancing offers will help you find the best deal. Factors to compare include:
- Loan amount
- Interest rate
- Loan term
- Monthly payment amount
Apply for Refinancing
When you have selected a lender, you can go ahead and apply for refinancing. You will need to have your documentation ready whether you apply online, over the phone, or in person. If you qualify, you can typically expect your loan to close within a few days.
Remember, it is important to keep making payments on your old loan in the meantime. Once the refinanced loan is closed, you will pay off the old loan and begin making payments on the new one.
Common Mistakes to Avoid
Refinancing your car loan can be the right decision, but it is important to avoid some common mistakes. Among them:
- Not calculating the total cost. Refinancing only makes sense if it saves you money in the long run. Be sure to read all of the contract terms and understand any potential fees. Consider what extending your loan term will mean for the overall cost.
- Not shopping multiple lenders. Going with the first lender that offers you a refinancing deal may be easy, but it isn't necessarily the best way. Comparing different lenders can help you get the best interest rate.
- Not recognizing potential scams. Auto loan refinancing scammers may ask you to pay them in order to secure lower monthly loan payments. Or, they may tell you start making your car payments to them instead of to your lender.
Can I Refinance My Car Loan Immediately After Purchase?
Some lenders may allow immediate refinancing, but most have a waiting period before you can refinance your car loan.
What Is the Average Interest Rate for Refinancing a Car Loan?
Auto loan interest rates depend on market factors, as well as the amount you borrow, the length of the loan, your credit score, your DTI, and the age of the car. A number of lenders and independent websites publish current interest rates on auto loans broken down by on credit score.
How Does Refinancing a Car Loan Impact My Credit?
Refinancing a car loan may cause a temporary drop in your credit score due to a hard inquiry on your credit file from your new lender. Having a new account on your credit report and a potential change in the average age of your accounts could also cause your score to dip a little. But if you make on-time payments on your refinanced loan, your credit score should recover relatively quickly.
How Much Can I Save On Monthly Payments After Refinancing My Car Loan?
How much you can save will depend on the balance of your loan, the loan term, and your new interest rate vs. the old one. A loan calculator can be useful tool.
Can You Refinance a Car Loan With Bad Credit?
Some lenders may be willing to work with you on refinancing your loan if you have bad credit. However, if your credit score dropped since you first secured the loan, you are unlikely to get a better interest rate.
The Bottom Line
You may be able to find a lender willing refinance your car immediately after purchase, but it is more common for lenders to have a 60- to 90-day waiting period. Before you decide to go for early refinancing (or any refinancing, for that matter), consider whether it makes financial sense. Refinancing is the right decision only when it will save you money in the long run.
