When Should I Refinance My Car?

Your vehicle shouldn’t be a financial burden. Instead, refinancing your car loan should work in your favor and lower your monthly payment or help pay off the debt sooner. So, when is the best time to refinance your ride?

Low Interest Rates

Some vehicles are bought when market interest rates are at an all-time high, but there’s no way around the purchase due to your vehicle not operating properly or it is damaged from an accident. If you are stuck with a high interest rate on your vehicle, wait for the market to go down and consider refinancing. When you refinance with a lower interest rate, you will be able to save money on your monthly payment.

Better Credit Score

Have you worked hard to improve your credit score? Then reap the benefits! The better your credit score, the better interest rates and terms are available to you. Credit scores play an important role when you refinance your vehicle. It tells lenders whether you are a good risk to loan money out to. Don’t try to refinance if you have a poor credit score. More than likely you won’t be able to get a better interest rate. Instead, keep paying on your current car loan on time to improve your credit score number.

Different Term

Sometimes you need to refinance because of a difficult financial situation, like losing a job. Your term is the amount of time it’s expected to pay back your loan at the minimum payments. If you need a way to lower your monthly payments but don’t qualify for a lower interest rate, then extend the term. Extending the term will give you more time to pay back your loan while lower the monthly payments.

New Lender

Not impressed with the service of your current lender? You don’t have to be stuck with them. Refinancing allows you to choose a new lender to switch you. If you are in the business of getting out of business with your current lender, then look for special promotions that fit your unique situation. Some credit unions offer incentives when you transfer your auto loan to them.

When You SHOULD NOT Refinance

While there is a good time to refinance, there are also bad times to refinance. If you’re in any of these situations, consider waiting to refinance your car loan.

Less than 6 months. Yes, you can refinance before your first payment on your vehicle, but a good rule of thumb would be to wait 6 months. When you refinance, lenders have to do a “hard” pull on your credit score. While an inquiry here and there won’t affect your score significantly, too many will make an impact and won't drop off your record for 24 months. To avoid this, wait to refinance your car until you have owned it for at least 6 months.

Negative equity. If you owe more than what the vehicle is worth, you are going to struggle to find a lender who is willing to help you refinance your ride. If you do find one, they probably can’t offer a better interest rate than what you already have. To get a better interest rate, you will need to pay the difference between your car’s value and what you still owe. To find out what your car’s worth, try using Kelly Blue Book.

About to pay it off. There isn’t much point to refinancing if you are about to pay it off. Since you’re at the end of your loan term, your monthly payments are going toward the principal of the balance. If you refinance, your monthly payment will likely go towards the interest first, which means you might end up paying more in interest.

Older car. A car older than 10 years isn’t usually worth refinancing. Many lenders have qualifications not to finance a vehicle at a certain age since they lose value and have more issues. If you need a refinancing option, consider a personal loan or trading in your vehicle instead.

Before you refinance, weigh the pros and cons. Oftentimes your local credit union can work with you to get the best rate with the most flexible term. So, don’t be afraid to shop around before refinancing. At the end of the day, refinancing should better your financial situation and not make it worse.