When Should You Refinance a Car Loan?

If you’ve purchased a new car or truck within the past few years, there’s a decent chance that you could see your payments reduced through the process of refinancing. While they’re not as sizable as most home loans, many auto loans are still great candidates for refinancing. Unfortunately, many borrowers simply aren’t aware of this option or how it can help them. 

You probably have a few questions, like “how do borrowers go about refinancing auto loans?” and “when is the right time to start the conversation?” In this blog, we’re going to answer these fundamental questions so you can make the right decision and give yourself some much-deserved financial relief!

What Are Reasons to Refinance a Car or Truck Loan?

You’re likely familiar with the general concept of refinancing a loan, which essentially involves replacing your current loan with a new loan (with more favorable terms). The more crucial question, then, becomes: “Is refinancing a car worth it?” With that in mind, then, let’s start by taking a look at how refinancing a loan can help save you money.

• You can get a better deal through refinancing. There are a number of reasons why you may not get a great deal when you make the initial auto purchase. For example, you may not have been prepared to negotiate confidently, especially if it was your first major purchase. Refinancing gives you a chance to re-enter negotiations (now that you know what you’re doing). Even if you’re happy with the original loan terms, lenders will sometimes offer special refinancing incentives worth checking out. It never hurts to contact your lender to see what they can offer.
• Your credit score has gone up since securing the original loan. Low credit scores or insufficient credit history can lead to high interest rates. As you make payments—to this loan and any other lines of credit you might have—and establish a consistent payment history, you’ll likely qualify for more favorable terms and interest rates through refinancing.
• You can tweak other aspects of your loan. By refinancing your loan, you may also be able to either shorten or lengthen the loan’s terms. While it’s easy to see how lengthening the loan’s terms could reduce your payments in the short-term, if you can afford to pay the loan off more quickly, you can ultimately reduce the total amount you’ll pay over the lifespan of the loan (by paying less interest).

How Soon Can You Refinance a Car Loan After Purchase?

Technically, you can refinance your car loan as quickly as you can find a lender willing to work with you and approve new loan terms. As explained by NerdWallet, though, many lenders will have their own practices around refinancing—requiring a loan to be open for at least six months, for example. 

So, you can refinance your car loan pretty quickly after purchase, but is that the best time to do so? Let’s explore this question next.

When Should You Refinance a Car Loan?

Generally speaking, it’s best to refinance when at least one of the following is true:

• Your credit score has improved since securing the original loan.
• Auto loan interest rates have gone down.
• You’ve shopped around and found better loan terms from another lender, like IMCU.
• Your monthly payments are higher than you can afford to keep paying.

Especially if more than one of these is true, it’s smart to consider refinancing. For example, if your credit score has gone up and auto loan rates have generally gone down, the amount you could stand to save—in individual payments, total payments and interest over the life of the loan, or both—could be substantial.

Should I Refinance My Car Loan Now, or Wait?

Just because at a certain point you can refinance doesn’t mean that’s the best time to do so. Especially if your loan is relatively new, there may be compelling reasons to wait a bit before starting the process. 

So, why is it bad to refinance a car loan right away? Since securing your original auto loan likely required a “hard inquiry” into your credit, it’s often recommended that you wait at least six months to a year before refinancing a car loan. This window of time allows your credit score to recover from the temporary hit triggered by the hard inquiry. Not only that, but your credit score may actually go up from making on-time payments in those first few months, as well.  

Again, just because you can refinance doesn’t necessarily mean right now is the best time to do so. In other words, much like there are certain times when it’s best to refinance your loan, there are certain situations in which attempting to refinance your auto loan would be inadvisable. They include the following:

• You purchased your car or truck within the past six months. As described above, it’s best to wait at least six months so your credit score can recover from the original hard inquiry.
• You’ve recently taken on additional loans. Like auto loans, other major loan types—a mortgage, for example—begin with an inquiry in your credit. So, again, wait until your score goes back up before refinancing.
• Your loan penalizes prepayment. Some loans will specify prepayment penalties—in other words, making payments ahead of time as a strategy for reducing the total amount of interest you’ll pay on the loan, might wind up actually costing you. 
• The amount you owe on the vehicle exceeds its actual value. This is what’s called being “upside-down” or “underwater” in your loan. If you try to refinance your loan while it’s underwater, and a lender is willing to work with you to do so, you can expect high interest rates.

Refinance With IMCU, a Lender You Can Trust

We offer auto loan rates! Indiana Members Credit Union streamlines the refinancing process so you can see lower payments right away. Our team of loan officers is ready to help you understand your refinancing options. Use our Branch Locator to find the IMCU location closest to you to connect with our team today!