Thinking About Refinancing Your Car? (2024)

FAQs

Thinking About Refinancing Your Car? ›

The best time to refinance is when interest rates have dropped or your credit score and DTI have improved. You should not refinance your car if you are close to paying off your loan, owe more than the car is worth or if interest rates are high.

Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month — but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.

If you refinance and extend your loan's term, you are more likely to end up owing more than your vehicle's worth. This is called being upside-down or underwater on your loan. Your chances of going upside-down with a longer loan term increase because cars generally depreciate in value each year.

When can I refinance my car after I buy it? After you buy a car, you have to wait at least 60 to 90 days before you can refinance, since it takes about this long to transfer the title to your name. Generally, it's best practice to wait to refinance a car loan for at least six to 12 months.

Refinancing will hurt your credit score a bit initially, but might actually help in the long run. Refinancing can significantly lower your debt amount and/or your monthly payment, and lenders like to see both of those.

A lender may not approve you for a refinance unless you meet a certain loan-to-value ratio (LTV). The LTV is the loan amount divided by the appraised value of your car. Check if you'll meet this requirement by finding the value of your car using online resources.

Refinancing may result in owing more over the course of your auto loan if a change in the loan term length, removing a co-borrower, credit score, payment amount, or interest rate contributes to a higher overall cost.

Refinancing risk refers to the possibility that a borrower will not be able to replace an existing debt with new debt at a critical point in the future. Any company or individual can experience refinancing risk, either because their own credit quality has deteriorated or as a result of market conditions.

Refinancing your car loan can be a good idea if it allows you to save money on interest, but it's not the right financial move for every borrower. The best time to refinance is when interest rates have dropped or your credit score and DTI have improved.

What is a good interest rate for a car? ›

Car Loan APRs by Credit Score

Excellent (750 - 850): 2.96 percent for new, 3.68 percent for used. Good (700 - 749): 4.03 percent for new, 5.53 percent for used. Fair (650 - 699): 6.75 percent for new, 10.33 percent for used.

Refinancing does start your auto loan over. When you refinance a car loan, you choose a new loan that has a different rate and possibly a different term. The new loan replaces your current loan. Refinance terms offered by lenders most commonly are from two to seven years.

What is a good interest rate for a 72-month car loan? An interest rate under 5% is a great rate for a 72-month auto loan. However, the best loan offers are only available to borrowers who have the best credit scores and payment histories.

If you've made all your car loan payments on time for six to 12 months, and kept other credit accounts up to date, your credit may have improved. If so, there's a better chance you can benefit from refinancing your car loan to a lower interest rate.

Can I refinance my car with the same lender? Yes, many lenders will allow you to refinance your existing car loan. Keep in mind that lenders may not offer refinancing as an option. Especially if your vehicle is in poor condition, has low value, or you have few payments remaining on your existing loan.

In general, lenders expect you to have a minimum of 20% in home equity to refinance. In other words, the loan balance must be 80% or less of the home's value. If you don't have enough equity to meet the lender's requirement—especially if you want to take cash out of the home—you may not be eligible to refinance.

Most of the time lenders require down payments, but even if it is not a requirement, it might be a good idea. (Providing a down payment will decrease your monthly payments and reduce the possibility of your car loan becoming underwater.)

Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.

Depending on the reason you are refinancing in the first place, you could actually pay higher interest costs than what you have on your current loan. For example, if you need more time to pay back the loan and refinance for a longer term, you'll end up paying more in interest – even if the rate is lower.

Refinancing your auto loan can negatively affect your credit score, but not for the long term. Your credit score may drop a few points, but it should rebound in a short time — usually after a few months of on-time loan payments.

Will I owe more if I refinance my car? ›

The downsides to auto loan refinancing can include paying lender fees and additional interest if you extend the loan term or cash out auto equity. You could also end up owing more than your car is worth.

Most lenders require at least 600. You likely won't get a better rate by refinancing with a score lower than this. It could even cost you more overall, especially if you increase your loan term to reduce your monthly payments. You can check your credit score for free.

The older the car, the more likely it is to have issues with reliability, safety, and resale value. A car over 10 years old, for example, typically isn't eligible for refinancing. Salvage title: If your car has a salvage title, it may be challenging to find a lender willing to refinance it.

The bottom line

You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.

Do you have to pay taxes on a refinanced car? Refinancing a car does not typically lead to a sales tax charge. Refinancing basically means that you are taking out a new loan against the vehicle and using the funds accessed through the new loan to pay off your existing loan.

As a rule of thumb, it's usually worth it to refinance if you could lower your current rate by one percent. One percentage point is a significant rate drop, and it should generate meaningful monthly savings in most cases.