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When Is the Right Time to Refinance a Car?

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Susan Guillory

Susan Guillory

Updated July 21, 2021
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When Is the Right Time to Refinance a Car?; If your credit score has improved, if loan rates are down, or if you have positive equity, it might be a good time to refinance your car loan.
“Refinance your auto loan today!” You’re being hit with ads online and flyers in the mail telling you, “now’s the time to refinance your car!” They promise you low rates, and you have to admit, you’re intrigued.But you’re just not sure about whether you should take advantage of any of these opportunities.You’re right to hesitate. When to refinance a car depends on several factors. Just because you could get what sounds like a great deal doesn’t mean that now’s the best time for you to refinance your vehicle. 

When Should I Refinance My Car?

So when is the best time to refinance? When exactly it's a good idea to refinance your car depends on several things. Here are six situations in which you might want to consider a car loan refinance.

1. When You Can Get a Lower Interest Rate

Interest rates change all the time, especially as the economy rises and falls. If you took a car loan out two years ago, you might see that current rates are much lower. You could save significantly by refinancing your car at a lower rate and paying several hundred dollars a month less than you do now.

2. When Your Credit Has Improved

Another factor that may change over time is your credit. Credit-building activities (including paying your auto loan on time each month) may increase your credit score. If, when you check your score, you see that your credit has improved, you may qualify for lower interest rates on a refinanced auto loan.Lenders look at several factors when determining your interest rate and the terms they will offer you. If your credit wasn’t excellent when you got your loan, you might not have gotten the best APR possible. But if your credit has improved since then, refinancing could open up better offers.

3. When Your Car Is Worth More Than You Owe

If you’ve kept your vehicle in top-notch shape, and perhaps have been aggressive about paying more than you owed each month on the loan, your car could be worth more than the balance remaining on your loan.If you’d like to take your time paying off the remainder, you might consider refinancing.

4. When You Can Pay Your Car Off Faster

Many people automatically choose the longest repayment period possible for their auto loans because it means the lowest monthly payment. But those longer-term loans usually have higher interest rates than loans with shorter repayment periods.If you can afford to make larger monthly payments, you’ll probably pay less in interest and get your car paid in full faster if you can refinance.

5. When You’re Struggling with High Payments

While you may not benefit from lower interest if you refinance over a longer period, it could help if you’re stressing to pay that higher amount each month. Let’s say you currently have a loan with a term of four years and are paying $500 a month, which is really eating into your budget. Refinancing for a six year term could drop your monthly payment to, let’s say, $375, so you might gain a little financial breathing room. Just be aware that you might have to pay more in interest over the life of the loan.

6. When You’re Unhappy with Your Lender

If you feel stuck with a lender who isn’t offering great customer service or is otherwise making your business relationship stressful, realize that you may hold the power to walk away by refinancing with another lender.Before deciding to refinance your auto loan, get familiar with auto loan terminology so you understand things like prepayment penalties, APR, and other terms that you’ll find in the fine print of your current loan agreement.

When Shouldn’t I Refinance My Car Loan?

Just as important as knowing when to refinance a car is knowing when not to do it. It can be tempting when you get those offers in the mail to refinance, but there are a few situations where you shouldn’t. Here are three to be aware of. 

1. When You’re Upside Down on Your Loan

If you owe more on your car loan than the car is worth, refinancing likely won’t help the situation. In fact, many lenders won’t even approve a loan if this is your situation. Your best bet might be to keep chipping away at what you owe.

2. When Your Car Is Older

The older your vehicle, the less likely a lender is to approve a refinance. Capital One, for example, won’t fund loans for cars that are more than 10 years old or have more than 120,000 miles on them.Why? Cars lose their value so rapidly that an older model may not be worth much by the time you seek financing for it. If you aren’t able to pay your loan, the lender has the right to seize the vehicle, but if it’s not worth much, that right doesn’t do the lender much good.

3. When You Don’t Need to Refinance a Lot

If you owe less than $4,000, you may have trouble finding a lender who wants to refinance such a small amount. That’s the threshold Capital One, for example, requires for auto loans, and other lenders likely have similar requirements.

How Difficult Is It to Refinance a Car Loan?

When's the best time to refinance a car? When you’ve done your homework and are armed with information. It’s not necessarily difficult to refinance a car, but it helps to start by knowing what lenders require in terms of how old the car can be and how many miles can be on it. You’ll also be asked how much you owe, so have that information handy.The most time-consuming part of refinancing a car loan may be shopping around. Don’t simply take the first offer you get. It’s also a good idea to see if you’re prequalified for a refinancing offer with the bank you already have a relationship with as well as with online lenders. Spending time seeing what you qualify for could end up saving you significantly.Also check your credit score before you apply, since that can impact what you’re able to qualify for.

Is Refinancing Worth It?

There’s no easy answer to this question. Your specific situation will determine whether and when to refinance a car loan. Ultimately, a refi should be financially beneficial, either because you'll pay less in overall interest by refinancing, or because you’ll relieve a financial burden with a monthly loan payment you can’t afford. Otherwise, it may not be worth it to refinance your auto loan.Beyond the loan term and interest rate, another factor to take into account as you evaluate a car loan refi, is how much you may have to pay in fees and/or penalties. These may or may not include:
  • A lender fee (typically could be $10)
  • A title fee (typically less than $75)
  • Prepayment penalties (on your existing loan)
These should all be factored into your decision, since they can all affect the bottom line.As you consider whether refinancing is a good move or not, find the answer to the question: how much does it cost to refinance a car? If, after fees and other expenses, you’re better off and paying less than before, it could be worth it.

Does Applying for an Auto Loan Affect Your Credit Score?

Does refinancing hurt your credit? The answer is that it depends.There are two parts to applying for a refinance loan. The first part is the prequalification step, which shows you what rate you would qualify for, should you refinance your car. This step does not impact your credit, nor does the inquiry appear on your credit report.The second is the preapproval step, which can impact your credit score. But know that if you’re shopping around, getting preapproved by multiple lenders may show up on your credit report as just a single inquiry as long as they’re within the same two-week period.Can you refinance a car loan with bad credit? Yes, but you probably won’t get a great interest rate. If it’s possible, it might be worthwhile to spend time building your credit so you can qualify for a better rate down the road.

The Takeaway

Knowing when to refinance a car can depend on all the factors we’ve covered in this article. Before going down this road, ask yourself why you want to refinance. Is it because you want to pay less in interest or possibly lower your monthly payment? Or are you just feeling like you’ll miss out on something because you’re getting all those refi offers in the mail?If a refi seems like the right decision, you may want to consider turning to Lantern by SoFi for auto loan refinancing. You can fill out one simple form to compare multiple offers from our network of lending partners. 
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0521080

Frequently Asked Questions

When is the best time to refinance a car loan?
When should you not refinance?
Should I refinance now or wait?

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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