There are a few reasons you might be thinking about refinancing a car loan, even if your purchase is recent. Maybe you got talked into a not-so-great deal from the dealership. Maybe your credit score just got boosted and you’re pretty sure you can get a lower interest rate. Or maybe your monthly payments are already taking a toll on you and you need to restructure your payments.
Whatever your reason is, if you are wondering how soon after your purchase you can refinance car loans, we're here to help. See, refinancing doesn’t have an exact time frame, but there are definitely times when it will make more sense than others.
So let’s talk about when you can, and when you should, refinance your car.
When It Makes Sense For You To Refinance Your Car Loan Early
Technically speaking, you can refinance your car loan at any point after you purchase your car. You will most likely need to wait at least 90 days for all of the paperwork to be finalized on your sale, but once everything is filed and completed, you can refinance at any point.
Experts recommend waiting at least six months for your credit score to bounce back from your initial application. When you apply for financing, your credit score will take a slight dip from the hard inquiries of your credit check. This can take 6-12 months to clear from your credit report.
Refinancing your car is most beneficial early on in your loan. This is because car loans are front-loaded, which means that in the beginning you pay mostly interest, and towards the end you pay mostly on principal. Refinancing saves you money in interest payments, so the earlier you refinance, the better.
So when does it make sense to do an early refinance? Car loans should probably be refinanced early if any of the following apply to you.
Your Credit Score and Creditworthiness Have Improved
If your credit score or creditworthiness have improved since your initial financing, it’s probably worth looking into refinancing. Lenders reserve their top interest rates for people with the best credit. There are four major components that lenders look at when deciding what terms they will offer. These components are known as the 4 c’s of credit:
- Capacity- your ability to repay the loan
- Collateral- what you have that can repay the loan
- Capital- how much you are worth
- Credit- your credit score and payment history
Ultimately, your credit score is affected by a combination of payment history, amounts owed, credit history length, credit mix, and new credit. It is very possible that one of these components has changed since your initial financing. Your credit score fluctuates based on many components, so check your credit report to see if your score has improved.
You Got a Bad Deal
If you got talked into dealer financing, you more than likely got talked into some bad terms. Dealers act as indirect lenders, working in between you and an actual lender. And by doing so, they jack up the pricing that the lenders offer so that they can make money as the inbetween. The lender is thus handling the actual financing, while the dealership is tacking on financing fees.
On top of that, you may have had a smooth talking salesperson who assured you that you were making a good deal, even though the rates didn’t sound particularly good for you. Even though your gut was telling you one thing, they were able to wear you down and talk you into less than ideal terms.
Customers regularly report saving a lot when they refinance away from dealerships. Many report savings of around $80-$100 per month.
Interest Rates Have Gone Done
If interest rates have gone down in general since you financed, it’s a good time to look into refinancing your car. The market rates dictate largely what interest rates can be offered, so this matters a great deal in the timing of your refinance. Market rates are still low but may be rising as the year progresses, so we recommend getting started today.
You Are Having Trouble Making Payments
If your monthly payments are already becoming hard to manage, refinancing your car is a great way to change your monthly payments.
First off, if your credit score has improved or market rates have decreased, there’s a good chance you will qualify for a lower interest rate. This will automatically make your monthly payments lower.
But even if you aren’t eligible for a lower interest rate, you can still change your repayment period to stretch the payments out over a longer period of time. Changing your repayment period from 36 to 48 months can greatly affect your monthly payments and can make your budget way more manageable every month.
Deciding To Car Refinance: What Are The Best Reasons To Do It Early?
What exactly are the best reasons for car refinance? Here are our top three reasons you should consider refinancing your car:
You can get a lower interest rate
By refinancing, you may be eligible for a lower interest rate. This means not only will you save money in the long run by paying less in interest, but you will pay less every month in payments.
If you have been making consistent payments and paying down your other debts, it’s likely your score has increased a few points. It’s always good to check your credit report consistently (you can check for free up to three times per year) to ensure that there are no errors. If you notice any problems, report them immediately to the credit bureau.
If your score has increased even ten or twenty points, that can translate to saving hundreds of dollars per year.
You can change your monthly payments
Refinancing allows you to change your monthly payments. Even if you don’t qualify for a lower interest rate, you can change your repayment period to a longer period if money is tight and you could use some wiggle room in your monthly budget. You can also shorten your repayment period so that you pay more per month, but pay off your loan quicker (this will save you a lot in extra interest payments). In fact, refinancing is the only way that you can change your repayment schedule.
So whatever the reason is, if you want to change your monthly payments, refinancing your car loan is the best option for you.
You can add or remove a cosigner
Adding a cosigner can be very beneficial to a borrower. If their credit score and credit history is better than yours, it can qualify you for a lower interest rate (and save you lots of money). Or maybe you want to help out someone who could use a credit bump. Parents will often add their kids as a cosigner to help them build up their credit. Adding them to your loan can help them out a great deal.
You cannot add a cosigner onto an existing loan – you must refinance and add their name to the new loan.
On the flipside, you might need to remove a cosigner. Either you don’t need their credit score to help you anymore, or you have parted ways and want to end your financial relationship. Whatever the reason is, you cannot simply have their name removed from the loan agreement – you will need to refinance your car loan to do so.
Is There A Downside if I Refinance My Car Early?
If you are thinking “I want to refinance my car, but aren’t there some downsides?”, we have some good news for you. There really aren’t any out and out downsides when it comes to refinancing. But there are two things you may need to consider that may influence whether or not you can refinance your car early.
Are there prepayment penalties on my current loan?
If your current loan has prepayment penalties, you need to factor that into your consideration. There’s a very good chance that even with prepayment penalties your savings will still outweigh any penalties you may have to pay. But it’s important to go over your numbers and make sure that refinancing your car loan will not end up costing you more money in the long run.
Is your car in good condition?
If your car is not in good condition, it might not be eligible for refinancing. A car with a lot of miles, or with more than average wear and tear, may not be eligible for refinancing. If your car loan is underwater, meaning you owe more on it than it is worth, your car also may not be eligible for refinancing.
You don’t need to wait to refinance your car
In fact, refinancing your car today can save you a lot of money in the long run. If refinancing sounds like it might be a good option for you, get started with Auto Approve today! We work with the top lenders to get you the best refinance rates possible.
So what are you waiting for?