You found the perfect vehicle at a great price and sealed the deal with a lender for an auto loan to finalize the purchase, but now circumstances have changed. Whether interest rates have dropped significantly or you realize you could qualify for a lower interest rate with a different lender, you may wonder how soon you can refinance a car loan. Refinancing can be a great option to lower your interest rate, monthly payments, or both.
What Is an Auto Refinance?
When you refinance a loan, you take out a new loan to replace the existing one. Refinancing is often done for various reasons, such as:
- Increased income: If you’ve changed jobs or received a promotion, your increased income may help you qualify for a lower interest rate.
- Improved credit score: You can increase your credit score to lower your interest rate by paying down debt or making on-time payments.
- Decreased interest rates: Interest rates fluctuate with the economy, so rates may have dropped, providing you with a lower option.
- Positive equity: Your loan-to-value (LTV) ratio may have increased, giving you a lower interest rate.
Just as there are times when it makes sense to refinance, there are also instances where it may not be a financially sound decision. These situations include:
- Negative equity: If you owe more than your vehicle is worth, you may not even qualify for a refinance option, and if you do, it will often be at a higher interest rate.
- Prepayment penalties: Your existing loan may have prepayment penalties that make it too expensive to consider refinancing as a viable option.
Each situation is unique, and you need to consider your financial goals to determine if refinancing is right for you. If your goal is to lower your interest rate, you need to ensure that this will happen with a new loan. If your goal is to save money on your monthly payments, you might be able to refinance to extend the length of your loan terms, even if that means a higher interest rate.
If repossession is possible because you’re struggling to make your auto loan payments, you may want to consider refinancing even though you’ll end up paying more in the long run. The cost of losing your vehicle and means of transportation to and from work may outweigh any prepayment penalties, additional interest charges, and the massive hit to your credit score a repossession will cause.
How Soon Can You Refinance a Car?
Technically, you can refinance your car any time after purchasing the vehicle, whether you bought it new or used. It may take up to 90 days for all the paperwork to be finalized, which is necessary before any refinancing can happen, but once that’s done, you can refinance your car. You could start the process in anticipation of the 90-day wait for filing paperwork so that you’re ready to refinance as soon as everything is finalized on your original loan.
That said, experts recommend that you wait a minimum of six months before seeking a refinancing option to protect your credit score. A vehicle loan requires a hard inquiry on your credit report, so a second hard inquiry in a short period of time can look bad on your credit history. It can take six to 12 months for this hard inquiry not to affect your credit score.
Refinancing is most prudent early on in your loan. However, loans are front-loaded, meaning that in the beginning, you’re paying the most in interest, while toward the end of your loan, you’re paying more of the principal. With a refinance, you save money on interest payments, so doing so early on will save you the most money.
Tips for Improving Your Credit Score
The best way to qualify for a better interest rate with a refinanced auto loan is to improve your credit score. Lenders perceive a high credit score as a lower threat of default, providing the best interest rates for those with the best credit. Here are some tips to improve your credit score before an auto refinance:
- Pay down debt. Reducing your overall debt, especially revolving debt such as credit cards, will positively impact your credit score.
- Make on-time payments. Paying your bills on time can improve your credit score.
- Keep usage below 30%. Keep your credit usage below 30% of your overall available credit to increase your score.
- Reduce inquiries. Multiple inquiries on your credit history, especially in a short time, can negatively affect your credit score.
Research Refinance Rates
When you decide that refinancing is a sound financial decision, you’ll want to start researching rates. Interest rates vary significantly between lenders, so you’ll want to get quotes from several to compare. If you seek quotes from various lenders within a 10-day time frame, it will often register as just one inquiry on your credit report. You can also find lenders that make a soft inquiry for pre-qualification purposes. You want to ensure that you get the best value for your money at the lowest rate possible. MarketWatch reports that the best auto refinancing rates available today include:
You can refinance your auto loan starting at $5,000 for 48 to 84 months with RefiJet. Rates start as low as 1.99%, although there’s a $395 administrative fee.
Refinance options through myAutoloan include traditional, lease payoff, and cash-back loans. You can apply for $2,500 to $100,000 in financing for 24 to 84 months at starting rates of 1.99%.
Caribou has rates starting at 1.99% for loans between $10,000 and $100,000 for 24 to 84 months. You can expect a $399 administrative fee from Caribou.
If you feel that you got a bad deal on your vehicle loan, have improved your credit score, or are having difficulty making your monthly payments, an auto refinance could be right for you. How soon you can refinance a car is ultimately up to you. If you want to start the process immediately after signing the loan papers for your current loan, you’re entitled to do so. However, waiting 90 days for paperwork finalization or six months to protect your credit score may still result in a better deal for you.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.