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When Should You Refinance Your Car Loan?

Financial situations and market conditions change, and as they do, they can present opportunities when it comes to your car loan. If you’ve been paying off a car loan, it may be advantageous to refinance. However, it must be timed correctly. 

Timing Car Loan Refinance – Factors To Consider

You’re likely asking yourself, “when should I refinance my car loan?”. The best timing for a car loan refinance depends on several factors. These factors influence whether or not refinancing will be advantageous to you.

Prepayment penalties

Some auto loans come with prepayment penalties. Since refinancing means paying off your current loan early, it’s worth taking into account if you’ll face penalties. If you do face penalties, consider if that extra cost will be balanced out by the benefits of refinancing, such as reduced interest.

Your car’s worth

Your vehicle’s worth also comes into play. If it’s an older vehicle whose value has diminished significantly, then it may not be a good idea to refinance. Not only will lenders be less likely to approve a new loan for the car, but you could also end up owing far more on your loan than the vehicle is actually worth.

Current market rates

Finally, current market rates also play a significant role in when you should refinance. Interest rates fluctuate over time, and if you’re currently facing higher rates, then now may not be the best time to refinance. On the other hand, lower rates could mean it’s a prime time to refinance your loan since you could save on interest over time.

Best Times To Refinance A Car Loan

With the main factors in mind, let’s look at the best times to refinance a car loan. If the following factors apply, then you should be good to refinance.

Your credit has improved

The higher your credit, the more likely you are to be approved for a car loan with low-interest rates. 

As such, if your credit score has improved since starting your loan, you may be able to secure a new car loan with a more favorable interest rate. Doing so can save hundreds—or even thousands—of dollars over the life of the loan, and it can reduce your monthly payments a little as well.

You’re able to take on higher monthly payments

If you’re earning more now than you were when starting out, or if you’ve paid off other debts in the meantime, then it may be advantageous to refinance to a shorter loan term. This might mean higher monthly payments, but it will also mean your loan has less time to accrue interest. As a result, you’ll end up paying less overall by paying off the loan sooner.

A side benefit of paying off your loan sooner is you’ll have more room in your budget for future loans if needed.

Interest rates have dropped

As market conditions shift, interest rates may drop. Switching to a new loan after a drop in the market can save on interest, especially if you’ve built up credit in the meantime.

You need lower monthly payments

In some cases, refinancing may not always be purely to benefit from reduced interest. You may need to lower your monthly payment by refinancing to a loan with a longer term. This is not ideal, but it may be necessary for some situations.


If the market conditions are right and if it seems like an otherwise viable option, refinancing may be a good idea if you need to ease your monthly expenses a little. This will help you make payments on time and potentially build credit.

When To Avoid Refinancing A Car Loan

While refinancing a car loan can often be beneficial, there are circumstances in which you will typically want to avoid it. These situations include the following:

You would end up underwater in the loan

Vehicles diminish in value over time. As such, if your car’s value has diminished significantly, or if you initially bought a used car, then refinancing may mean owing more on the loan than your car is worth. This condition is referred to as being “underwater” or “upside-down” in the loan, and it can cause complications.

For instance, if you get in an accident that totals your vehicle, the insurance payout won’t likely cover the amount you still owe on the vehicle. While many lenders offer GAP insurance to cover that difference, it does mean you’d be less likely to be approved for refinancing on an older vehicle.

You’re almost finished repaying

If you’re almost done repaying your loan, odds are your vehicle is worth less than the initial amount. So, it probably won’t be that beneficial if you’ve been paying off your loan for some time, and you’ll be less likely to be approved for refinancing anyway.

Interest rates have gone up

If market rates have gone up since you started your loan, then refinancing could mean paying more in interest over time. Unless you absolutely need to refinance to meet monthly payments, it’s best to avoid doing so when market rates are high.

You’ve already refinanced in the past

Although there are no legal limits on how many times you can refinance a car loan, it’s generally not a good idea to refinance multiple times. Each loan has its own closing costs, and you’ll pay those again each time you refinance. 

In addition, lenders are less likely to approve multiple refinancing applications.


While it may still be beneficial in some cases (such as if your financial situation has improved tremendously since the last time you refinanced), you’ll usually want to avoid refinancing multiple times whenever possible.

When Should I Refinance My Car Loan?

In summary, refinancing a car loan is generally best if market conditions are right, your financial situation has improved, or if you have better credit. Otherwise, it may be best to wait it out and pay off your original loan.

Learn more about refinancing your car loan

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