When to refinance your car loan (& when to wait)

Refinancing your auto loan can help you get a lower interest rate or change the loan term, which could save you money on interest, lower your monthly payments—or potentially both. If you only recently bought your car, or you’ve had it for several years, you might be wondering if it’s too soon, too late, or the perfect time to refinance.  

When to refinance your car loan 

Timing can be a huge factor when considering an auto loan refinance. Many lenders have required waiting periods before you can refinance or cut off periods when it’s too late. Let’s take a closer look at some of the timing restrictions lenders may have around refinancing.  

The first 60 to 90 days of the car loan 

Most lenders require that you’ve had the loan for at least a few months before you can apply to refinance. At LendingClub Bank, for example, the minimum requirement is 90 days. This allows time for the car title to transfer from the manufacturer or previous owner to your current lender. The new lender also wants to see if you’ve been making on-time payments for the first few months. 

At least 24 months remaining on the car loan 

If you’re considering refinancing, you’ll want to act while there’s still some time left on your loan because many lenders have a minimum requirement. For instance, LendingClub Bank requires at least 24 months remaining on the original loan term. Plus, the later in the term you are, the more interest you’ve already paid off—which means it could be more cost-effective to simply stick with your original loan and finish off the principal. 

7 signs it’s a good idea to refinance your car 

There are more telltale signs refinancing your car loan is a good option for you. Consider these common situations when it may make sense to try to refinance your auto loan. 

1. Your credit score has increased 

If you’ve been paying your debts on time, your credit utilization has decreased, or you’ve made other moves to improve your credit score, you may be able to qualify for a lower rate than you received when you first bought the car. Even a small reduction can meaningfully impact your total interest and monthly payments. When you applied for the original loan, the lender likely did a hard inquiry on your credit report. Waiting a few extra months can give your score time to recover, which may help you get a better interest rate.^[1] 

2. Interest rates have dropped since you purchased your vehicle 

If prevailing interest rates were higher when you first took out your loan, it might be worth checking whether you can lower your rate. Many lenders allow you to check your potential rate without doing a hard credit check, so you can see your savings without impacting your credit score.^[1] 

3. You want a lower monthly payment 

Refinancing isn’t just about potentially saving money—you can also refinance to put more room in your budget. Lengthening your term may increase your overall interest costs, but it also reduces your monthly payment. If bills are tight, refinancing to lower your payments may be the solution you’re looking for.^[2] 

4. You financed your current auto loan with a dealership 

Dealer-financed auto loans are often not the best deal. Because dealers act as a go-between for shoppers and the bank, they tend to mark up the interest rate to get a cut. By refinancing directly with an online lender, credit union, or other financial institution, you’re avoiding that markup, which can save you money.  

5. You want to pay off your auto loan sooner 

Can you swing a higher monthly payment? If so, you may be able to refinance into a loan with a shorter term. Not only will you pay off your loan more quickly, but you could also save on overall interest.^[2] 

6. You want to remove a co-signer 

Maybe you needed a co-signer to qualify for your original loan, but you’ve established or improved your credit since then. If so, you can try to remove your co-signer by refinancing into a loan of your own.^[1]  

7. You need extra cash 

Some lenders offer a cash-out refinance option, which means you can take out a loan for more than the value of your car and keep the difference in cash. 

5 signs you shouldn’t refinance your auto loan 

Auto refinancing can make a lot of sense for some people—but before choosing to refinance, it’s important to make sure the timing is right. Here’s a closer look at some common situations when you may want to hold off on refinancing your loan.  

1. The interest rate is higher than your current loan 

If your credit score has gone down or rates have gone up since you first took out the loan, you could end up with a higher interest rate through refinancing. That might be okay if your goal is to get a longer term and lower monthly payments. However, it’s important to do the math first to make sure the trade-off is worth it. 

2. You owe more than the value of your car 

Depending on how far along you are into repaying your loan and other factors, like depreciation or missed payments, you may owe more on your current loan than the vehicle is worth. This situation leaves you “underwater” or “upside down” on the loan. Most lenders won’t refinance this type of loan. If they do, the rate and terms will likely be unfavorable. Before applying for a refi, check your car’s value compared to your loan payoff amount to see where you stand.^[3]  

3. You waited too long to refinance your auto loan 

Lenders typically require borrowers to have at least two years left on the loan in order to qualify for refinancing. Additionally, it can be tough to refinance a car that’s over 10 years old or with 140,000 (or more) miles on it.  

4. Your current auto loan has a prepayment penalty 

Paying off your current loan early could cost you a prepayment penalty fee, often charged as a percentage of your outstanding loan balance. Be sure to read the disclosures and fine print to understand whether your existing loan is subject to any prepayment fees and how much they’ll cost. Then, weigh the fee against the potential savings you’ll get with a new loan to see if it makes sense financially.^[2]  

5. You don’t want your credit score affected 

Refinancing an auto loan typically results in a hard credit inquiry from the lender, which can cause your score to drop. The dip is usually only a few points, and it’s temporary. However, if you’re in the middle of applying for a mortgage or other credit, it’s probably a good idea to hold off on refinancing your auto loan. Learn more about soft vs. hard credit inquiries.^[4]  

Is refinancing worth it?  

Refinancing may be worth it, depending on your financial goals and situation. Before deciding to refinance your auto loans, it’s important to carefully consider your credit situation, interest rates, and your motivation for refinancing. The timing may not always be right, and in some cases it may not even be possible to refinance due to lender restrictions.   

How to get started refinancing your auto loan If you’re thinking of refinancing your auto loan, you can start the refinancing process by reviewing the details of your current auto loan, including your outstanding loan balance, annual percentage rate (APR), and time left on the loan term. Next, check your credit to make sure it’s in good shape. If it needs improvement, then take steps to improve your score.   

Check with lenders to see what kind of interest rate and terms you can qualify for. Many lenders, including LendingClub Bank, will show you a potential rate without doing a hard credit inquiry. When it comes to actually applying for loans, submit all your applications within a span of a couple of weeks to minimize the impact to your credit score.^[1]  

The bottom line 

Whether you want to pay off your vehicle faster, have smaller monthly payments, or save on interest, auto loan refinancing can be a powerful personal finance strategy that can be tailored to your unique financial situation. However, it’s important to carefully consider a wide range of factors to determine if the timing makes sense to refinance your auto loan.     

1. Consumer Financial Protection Bureau. “What should I know before I shop for a car or auto loan?” 

2. Consumer Financial Protection Bureau. “Can I prepay my loan at any time without penalty?” 

3. Federal Trade Commission Consumer Advice. “Auto Trade-Ins and Negative Equity: When You Owe More than Your Car is Worth” 

4. Consumer Financial Protection Bureau. “What’s a credit inquiry?