Can You Refinance a Car Loan? What You Need To Know
Written by
Karen Doyle
Edited by
Melanie Grafil
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When interest rates fluctuate, you may find yourself in a situation where you have a car loan that charges a higher rate than what is currently available. If the difference between the rate you’re paying and the available rate, you may find yourself wondering, “Can I refinance my car loan?”
Refinancing your car loan is essentially taking out a loan at a lower interest rate to pay off your higher-rate loan. It may result in lower monthly payments or even a shorter term. This can mean big savings over the life of the loan.
Can You Refinance a Car Loan?
Yes, you can refinance a car loan. There are also a few things to keep in mind, however.
When you refinance your car loan, you are taking out a new loan and using it to pay off the existing loan. This means that you need to qualify for the new auto loan, just as you did for your current one. If something has changed financial circumstances, such as your income or credit history, you may not qualify.
Things that might affect your ability to refinance a car loan might include:
- Job loss
- Decrease in credit score
- Negative equity in the vehicle
- Age and mileage of the vehicle
- Current interest rate market
Say, for example, you experienced a drop in your credit score. The interest rate you qualify for may make the refinance unattractive.
You also need to consider the current value of your vehicle. If you bought the car new and you haven’t had it very long, it may not be worth as much as your current loan balance. This is a particular risk if you didn’t have a trade-in for your current car or if you put down a small down payment.
Conversely, if your car is older and has high mileage, its value may be less than the amount of your loan.
This is not to say that it’s impossible to refinance a vehicle in which you have negative equity–in other words, you owe more than the car’s value. That means you would need to pay the difference out of your pocket to satisfy the original loan.
An Example
Suppose you have a $20,000 loan balance, but your car’s value qualifies you for a loan of no more than $18,000. You could take out a new loan for $18,000 and use that money, plus $2,000 of your own money, to pay off the original loan of $20,000.
How Soon Can You Refinance a Car Loan?
If interest rates drop sharply immediately after you buy your car, it may be tempting to try to refinance right away. However, some lenders require a six-month waiting period before they will refinance your loan.
Refinancing your car loan can be a smart choice if interest rates fall, if your credit improves, or if you need to have a lower monthly payment. It’s usually a good idea to wait at least six to 12 months after buying your car to refinance, though, to build your credit so you can secure the best possible terms.
Can I Refinance My Car Loan with the Same Lender?
Your current lender may be willing to refinance your car loan, but it pays to shop around. Your current lender will often want to keep your business, so they may allow you to refinance. A different lender might offer a better rate, terms or other incentives to gain your business, though.
If your existing loan is through the car dealer, take a look at banks and credit unions and compare the offer to what you’re currently paying. They may offer better rates and a streamlined application process.
Your current lender, especially if it is the dealer from whom you bought the car, may be counting on you not bothering to look for a new loan, so be sure to shop around for the best deal.
When Should You Refinance Your Car Loan?
There are certain times when it makes sense to look at refinancing your car loan.
Interest Rates Have Dropped
Lower rates mean smaller monthly payments, so if the prevailing interest rate has dropped a percentage point or more since you purchased your car, check to see what your new payment would be to see if it makes sense.
Your Credit Score Has Improved
Higher credit scores qualify for better loan terms, and if you’ve been paying your car loan on time for a while, your credit score may have improved enough to make a difference in your rate.
You’re Struggling with Payments
If you’re having trouble making your monthly payments, you may be able to refinance for a longer loan. Extending the loan term can reduce your monthly costs, although you’ll pay more in the long run.
You Want to Pay Off the Loan Faster
Refinancing to a shorter term can save on interest, reducing the amount you pay over time. Pairing a lower interest rate with a shorter loan term is a win-win.
How To Refinance Your Car Loan in 5 Steps
Follow these five steps to refinance your current auto loan.
- Check your current loan terms: Review your interest rate, remaining balance, and be sure you understand any prepayment penalties.
- Compare lenders: Research banks, credit unions and online lenders for the best refinancing offers. Check with your current lender to see if they’ll refinance at a lower rate or better terms, but be prepared to take your business elsewhere if they say no.
- Get prequalified: See what rates you qualify for without impacting your credit score so you can negotiate from a position of strength.
- Apply for refinancing: Submit a formal application with financial documents, including pay stubs, W-2s, and bank and investment statements.
- Sign the new loan agreement: If approved, the new lender will pay off the old loan, and you’ll start making payments under the new terms.
Final Thoughts
Refinancing your car loan can make good economic sense, but make sure you understand the pros and cons. Make sure a lower interest rate will make enough of a difference to make the switch. If you have negative equity in your vehicle, you’ll need to have a plan to make that up. Also, it’s good to see the difference between short and long-term loans, and what they each may do to your monthly budget.
Above all, be sure you understand all the terms and conditions of your new loan, including prepayment penalties, the new interest rate, and any other terms and conditions.
Can You Refinance a Car Loan? FAQ
Here are the answers to some of your most frequently asked questions about refinancing car loans.- Can I refinance my car loan with the same lender?
- You may be able to refinance your car loan with the same lender. Some lenders will refinance to keep your business; others will not. Check with your lender, but be prepared to go elsewhere if they decline.
- How soon can I refinance my auto loan?
- It's usually a good idea to wait at least six to 12 months before refinancing your car loan after you've first applied for the loan.
- What credit score do I need to refinance a car?
- Every lender has their own criteria for an acceptable credit score, but the higher your score, the better your interest rate will be.
- Will refinancing my car lower my monthly payment?
- To get a lower monthly payment, you will need either a lower interest rate or a longer loan term, or both.
- Can I refinance if I owe more than my car is worth?
- A lender will not loan you more than the value of the car. If you owe more than the current value of the car, you would need to pay the difference to refinance.
- Is there a downside to refinancing a car loan?
- Depending on the circumstances, you could end up with a higher monthly payment or a longer loan term when refinancing a car loan. Be sure you understand all the terms of the loan and exactly what the costs are before you sign for a new loan.
