When Can You Refinance a Car Loan?

If you’re wondering when you can refinance a car loan, the answer is usually pretty soon after you take out the loan. In most cases, you can refinance a car loan as soon as you have equity in the vehicle. Keep reading to learn more about car loan refinancing and how it can benefit you.

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You can refinance a car loan as soon as you have paid off a significant portion of the principal balance. The timing of your refinance is important, as it can affect the amount of interest you pay over the life of the loan. In general, it’s best to refinance when interest rates are lower than when you originally financed your car.

There are a few other things to consider before you refinance a car loan. First, you’ll need to determine if you have enough equity in your car to qualify for a new loan. Equity is the portion of your car’s value that you own outright; it’s what’s left after you subtract the outstanding balance on your loan from your car’s appraised value or selling price.

You’ll also need to consider the cost of refinancing, which includes fees charged by the lender as well as any prepayment penalties that may be assessed by your current lender. Finally, you should compare offers from multiple lenders to get the best deal on your new loan.

When You Should Refinance

Refinancing a car loan can save you money if you do it at the right time. You should refinance your car loan when interest rates are lower than when you originally financed your car. You may also want to refinance your car loan if you have improved your credit score since you originally financed your car.

You Have a High Interest Rate

If your current auto loan interest rate is significantly higher than the national average of 4.21% APR for a new loan, or higher than what other lenders are offering, it may make sense to refinance.

You can use our auto loan refinance calculator to estimate how much you could save by refinancing your car loan at a lower interest rate. Keep in mind that you’ll need to provide documentation of your income, employment and debts to qualify for a new loan.

You Have a Short Loan Term

If you took out a five-year loan to finance your car, you’ll probably start thinking about refinancing after you’ve made a few payments and your loan balance is lower. If you refinance at that point, you may be able to get a lower interest rate and lower monthly payments. Of course, you’ll need to have good credit to qualify for the best rates.

If you financed your car with a seven-year loan, you may want to refinance sooner rather than later. That’s because the longer your loan term, the more interest you’ll pay over the life of the loan. Refinancing can help you get a lower interest rate and save money in the long run.

You Have Improved Your Credit Score

If you refinance soon after you get your loan, you may not realize much benefit. That’s because most car loans are structured so that the bulk of the payments goes toward interest in the early years, with a smaller portion applied to the principal balance. In the later years of the loan, the reverse is true.

But if your credit score has improved since you got your loan, you may be able to get a lower interest rate by refinancing. A lower interest rate will save you money over the life of the loan, and may also help you pay off your loan more quickly.

When You Shouldn’t Refinance

You shouldn’t refinance if you have negative equity, which means your car is worth less than the outstanding balance of your loan. You also shouldn’t refinance if you’ve only been in your current loan for a short period of time, as it takes time to recoup the costs of refinancing. Finally, you shouldn’t refinance if you don’t have a good credit score, as you may not be approved for a new loan.

You Have a Low Interest Rate

If you obtained a low rate when you first financed your car, it might not make financial sense to refinance. For example, if you got an auto loan at 3% interest and you still owe $15,000 on the loan, you would only save about $62 per month by refinancing at 4%.

You would also lengthen the life of your loan, which means you’d end up paying more in interest over time. In this example, it would cost an additional $1,140 in interest to finance for another five years at 4%.

You Have a Long Loan Term

If you have a long loan term, you may not want to refinance because it could mean extending the length of your loan. This would give you more time to pay off the loan, but it would also mean paying more in interest. You should only refinance if you are comfortable with lengthening the term of your loan.

You Have a Prepayment Penalty

If you have a prepayment penalty, you may want to think twice before refinancing. A prepayment penalty is a fee charged by the lender if you pay off your loan early. This fee can be a percentage of your loan balance or it could be a set number of months’ worth of interest payments. Either way, it can add up to a lot of money, so be sure to factor it into your decision.

How to Refinance

If you’re looking to save money on your car loan, you may be wondering when you can refinance. You can usually refinance a car loan as soon as you have equity in the car. This means that you have paid off enough of the loan so that the value of the car is greater than the remaining balance on the loan. Keep reading to learn more about refinancing a car loan.

Shop Around for the Best Rate

When you first finance a car, you usually do so through the dealership. However, you might be able to get a better interest rate by refinancing your car loan with a different lender, which could save you money over the life of the loan.

You can start by checking rates with your current lender to see if they can match or beat the rate you found elsewhere. If not, then it’s time to start shopping around for a new lender.

Look for lenders that specialize in auto loans and compare their rates before applying. You’ll want to make sure to compare apples to apples when it comes to loan terms, such as the length of the loan, so you can make an accurate comparison.

Keep in mind that your credit score will play a big factor in getting approved for a refinance and what interest rate you’re offered, so it’s a good idea to check your credit report and score ahead of time.

Get Pre-Approved for a Loan

Before you begin shopping for a new loan, it’s important to get pre-approved. This will give you an idea of what interest rate and monthly payment you can expect. It also shows dealers that you’re a serious buyer with the financing in place.

You can get pre-approved for a loan through a bank, credit union, or online lender. The process is relatively straightforward — you fill out an application and provide some financial information, including your income, debts, and assets. The lender will then pull your credit report and give you a conditional approval based on their internal guidelines.

If you have good credit, you should have no problem getting pre-approved for a loan with competitive terms. If your credit is less than perfect, you may still be able to get approved but may have to pay a higher interest rate or put down a larger down payment.

Consider the Length of the Loan

One of the major benefits of refinancing is the ability to secure a lower interest rate, which can save you money over the life of your loan. In order to realize these savings, you’ll likely want to keep your loan term the same or shorter. For example, if you have five years left on your loan and you refinance into a new five-year loan, you’ll still be making payments for another five years. However, if you extend your loan term to six or seven years, you may lower your monthly payments but wind up paying more interest over the life of the loan.


Generally, you can refinance a car loan as soon as you have equity in the vehicle—meaning, as soon as you own more of the car than the lender does. Equity typically builds soon after you buy the car, as every car payment you make reduces the amount you owe on the loan. Most lenders require at least 10 percent equity in order to refinance, but some may require up to 20 or 30 percent. You can check your equity by subtracting the amount you still owe on your loan from your car’s current value.

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