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When Should You Refinance Your Car?

Refinancing your original auto loan to one with a lower interest rate or a shorter loan term could be a smart and money-saving financial decision. Saving big on interest, lowering your monthly payments or being able to pay off your loan earlier are all potential benefits of refinancing a car. Let’s explore the potential pros or cons of refinancing a car so you can see if it’s right for you.

First, what is car loan refinancing?

An auto loan refinance is when you apply for a new auto loan to replace your current one – which also gives you the new loan’s interest rate, loan term and monthly payment. The money for the new loan pays off the remaining loan balance on your first one. You can do this auto refinancing with your current lender or a new financial institution.

When’s a good time for an auto loan refinance?

That depends on your situation and your goal. Here are some reasons you may want to consider an auto loan refinance:
  • Save money with lower interest rates. If current market interest rates have gone down since you got your auto loan, refinancing to a lower interest rate means you’ll pay less interest. This saves you money right away, not to mention all those interest savings you’ll enjoy in the long run.
  • Reduce monthly payments. You may be able to do this by refinancing to a lower interest rate at the same term, or by refinancing to a longer loan term. Keep in mind that if you increase your term, you may end up paying more in interest over the long haul. But that may be worth it to you if your bigger goal is freeing up extra breathing room in your budget now.
  • Shorten your term for an early payoff. Refinancing to a shorter loan term means you could pay off your loan sooner. Note that shorter loan terms can make your monthly payments higher, but it will depend on your new interest rate, too.
  • Take advantage of an improved credit score. If your credit score has gone up since you got your original auto loan, you’re in a good position for more options as a lower-risk borrower. For example, you may now qualify for:
    • A significantly lower interest rate, which can lower your monthly payment and the interest you pay over the life of your loan.
    • More flexibility with your repayment terms to better fit your budget – such as potentially getting a longer term without having to pay as high of an interest rate as you would’ve before.
    • The ability to waive a co-signer, which means the new refinanced auto loan would be exclusively in your name instead of having someone sign on the loan with you.

How soon can you refinance a car loan?

While you can refinance immediately after buying a car, waiting a few months could get you a better rate. At the least, you typically need to wait 60 to 90 days for your vehicle title and loan paperwork to process. Some other auto lenders (not Summit) also enforce a “seasoning period.” This means you have to hold the loan for at least 90 to 180 days before you can refinance.

Did you buy your car not long ago?

It’s smart to give it a little time between your original loan and a refinance. When you apply for a loan, the lender checks your credit – known as a hard credit inquiry – which means they’re looking at your credit history to determine your approval and rate. It can make your credit score dip a bit, especially since closing your previous auto loan to get a new one also lowers the average age of your credit accounts. This credit score dip is normal and doesn’t last long!Waiting at least 6 to 12 months to refinance can be helpful to:
  • Give your credit score time to come back up after the dip from your hard credit inquiry.
  • Give you a chance to make timely payments on your new car loan and to qualify as a stronger borrower when you’re ready to refinance.
  • Help you avoid being “upside down” on your car loan (owing more on your loan than it’s worth). Since cars lose value quickly, your loan-to-value ratio may not look as healthy right after you buy a car as it does later on. A better loan-to-value ratio can make it easier to get approved for a new loan.

Wondering about other examples of when to avoid refinancing?

Along with factoring in how long ago you got your original loan, also ask yourself these questions to consider if the benefits are in your favor before moving forward with a refinance:
  • Have interest rates or your credit score improved? If not, consider waiting until interest rates have gone down or your credit score has gone up enough to make the refinance most worthwhile.
  • Are you planning on applying for a different large loan soon? For example, if you’re in the middle of buying a home, you’ll want to hold off on anything that could impact your credit score – which includes refinancing your car.
  • What fees might apply if you refinance? If you want to pay off your auto loan early or apply for a new auto loan, Summit doesn’t charge you fees for either. But some lenders do! Look over your current loan contract or reach out to your lender to make sure you know your cost to refinance a car, which may include:
    • Current lender’s fees – It’s becoming less common, but some lenders (other than Summit) will charge prepayment penalties or early termination fee for ending your auto loan early with them.
    • New lender’s fees – When you apply to refinance your auto loan, you may be charged an application fee or loan origination fee. Again, not at Summit!
    • State fees – You may have to pay a title transfer fee to the Department of Motor Vehicles (DMV), depending on how you’re refinancing your vehicle. This is to cover administrative costs, such as recording the current lienholder (the lender who gives you the new loan). In Wisconsin, this can be from approximately $40, if there are no title changes, to approximately $254.50, if there are title changes.

Comparing loans can help you decide if an auto refinance makes sense

Use our to compare your current auto loan with a possible new refinanced loan:
  • Enter the loan amount, term length and interest rate for your current loan and for your potential new loan.
  • Compare the difference in monthly payments with each loan.
  • Also, compare what the costs of each loan will be once it’s paid off (including principal and interest).
Looking at the numbers will help you determine what loan terms to choose and how much you could save now and in the long run.

Thinking it’s time to refinance and start saving money?

It’s fast and easy to ! Check out our to see if could save by refinancing at Summit.Reach out to us anytime with questions by giving us a call at 800-263-5560 or to meet with one of our loan advisors by phone, video or in person. You might also be interested in Refinancing your original auto loan to one with a lower interest rate or a shorter loan term could be a smart and money-saving financial decision. Saving... Remodel dreams or debt relief? Discover how your home equity could unlock both—HELOC vs. home equity loan, explained... Want to unlock your home’s value? Read more to learn how to calculate home equity and put it to work... Buying a car is a big deal — hey, those things are expensive! And even if picking out a vehicle is one of your most favorite things ever, it can still... Each generation comes with its own unique challenges. For millennials, this often means a lower degree of financial literacy. Finances can be daunting... Financial success isn’t how much money you have — it’s feeling good about what you’re doing with the money you have... An easier, more affordable way to buy, build or refinance a home A house is one of the biggest purchases you’ll probably ever make. Which means you really... Navigating finances after college is hard, but you can take it one lesson at a time. Get tips for managing money and paying off student debt after graduation... Sometimes having a little extra cash is the only thing between you and your dreams. Check out these financial tips to be smart about borrowing money and...