Car refinancing is a great way to save money on one’s monthly car payment, but timing is everything to get the best deal. According to Lantern by SoFi, “essentially, auto loan refinancing is taking out a new loan to pay off your existing car loan.” One wants that new loan to have better interest rates than the current loan, and the ability to do this varies throughout the life of a loan. The following information looks at the pros and cons of refinancing at each stage of the auto loan.
The First 60 to 90 Days of the Loan
It can be difficult to refinance an auto loan this early. Most lenders won’t consider refinancing until the vehicle’s title transfers from the previous owner or manufacturer to the current owner. In addition to waiting on the title, refinancing this early can be hard to do unless one has a good credit score. The original loan puts a hard inquiry on the borrower’s credit report. This causes their credit score to drop. A lender will require a higher interest rate for those with a low credit score. The higher interest rate makes it useless to refinance because no money is saved. One will do better to wait.
Six Months In
Waiting until the original loan is at least six months old allows one’s credit score to rebound. Being patient results in a new car loan with a lower interest rate and lower monthly payments, which is the goal of car refinancing. If one is a first-time car buyer or they have credit issues, it is best to wait one full year. This allows one to build a good credit history with on-time payments. Making those payments in a timely manner is crucial to obtain a better loan. Without six to twelve months of on-time payments to the original loan, most lenders can’t even approve a new loan.
Two Years Left on a Current Loan
To see the biggest benefit from car refinancing, one should have at least two years or more left on the current loan. Just like refinancing too early, waiting too long can backfire. This is because most of the interest on an auto loan is paid during the first part of the term. Waiting too long results in little to no savings. There may be refinancing requirements that will affect one’s ability to get a new loan this late in the game as well. Each lender is different, but they all will consider the remaining balance on the current loan, the age of the car, and the vehicle’s mileage. One needs to ask specific questions about any refinancing requirements when applying for the loan. Otherwise, they may end up with monthly payments similar to what they have now with little savings on interest.
Understanding how the auto loan process progresses over time allows one to make an intelligent decision when it comes to saving money by refinancing.
