When should I refinance my car loan? Plus when to wait

Auto loan refinancing is generally a good idea if it allows you to save money on interest. But it’s not always a wise financial move, especially when interest rates are high.

Refinancing means replacing an existing loan with a new one, typically through a different lender. Most use it to reduce their monthly payments by getting a lower rate or extending their loan term. But is the process worth it for you? Think carefully before applying.

When should you refinance your car?

There is no best time to refinance your car loan — if it saves you money, it is a good time.

To illustrate, imagine the remaining balance on your auto loan is $18,000, the current monthly payment is $450, and you have four years remaining on the loan term. You get approved for a four-year auto loan, but the interest rate will be 5 percent instead of the 8 percent you currently pay.

Your monthly payment will drop to $414.53, and you’ll save $1,702.69 in interest over the loan term by refinancing.

There are a few situations where refinancing makes the most sense.

When rates have dropped since your last auto loan

Refinancing is a good move when average rates are dropping. Unfortunately, auto rates have steadily risen throughout 2023 and into 2024. Our experts forecast rates will cool off slightly for good-credit borrowers but generally remain elevated through 2024.

Auto loan refinancing rates tend to track with used vehicle rates, which are currently sky-high.

The average interest rate for a used car loan with a 48-month term was 7.70 percent as of late July 2023. The average rate for the same type of loan is now 8.48 percent as of May 2024.

You may still find better rates by getting a loan with a shorter repayment term and keeping your credit score high.

When your credit score and DTI have improved

Even if market rates haven’t changed drastically, improving your credit score may be enough to get a lower rate. You may qualify for better loan terms, reducing your monthly and overall costs. A borrower with a better credit score can secure more competitive rates.

Here are the average rates for each credit score range, according to Experian’s first-quarter 2024 data.

Personal FICO score	Average interest rate for used car loans
781 to 850	6.80%
661 to 780	9.04%
601 to 660	13.72%
501 to 600	18.97%
300 to 500	21.57%

A lower debt-to-income ratio (DTI) can also result in better rates. Pay down any existing debt and calculate your DTI to determine where you land ahead of refi.

When you received your initial loan from the dealer

Dealers tend to charge higher rates than banks and credit unions to make a profit. If you took out your initial loan through dealer-arranged financing, refinancing with a different lender could get you a lower rate.

Bankrate tip

Use a car loan refinance calculator before deciding if you can secure better rates and terms than a dealership loan.

When you’re struggling to keep up with payments

Refinancing a car loan can sometimes get you a more affordable car payment even without a lower interest rate. If your budget is tight and you need to reduce your car payment, you could refinance your loan to a longer repayment term. But expect to pay more in interest because you are extending the loan.

You have positive equity in your car

Lenders view positive equity — cars worth more than you owe — as a big plus when refinancing. This is largely because the lender stands to make more if you default and it repossesses your vehicle to sell. This possibility means the lender may offer you a lower interest rate.

You can estimate your car’s value on websites like Edmunds or Kelley Blue Book. Once you’ve gotten an estimate, divide the number by your outstanding balance to determine if you have positive equity.

For example, if your car’s value is $20,000 and your remaining balance is $15,000, your loan-to-value ratio is 75 percent. That means you have 25 percent equity in your car.

You have issues with your current lender

Not every lender will work with you when facing financial or other issues. Even small matters can snowball into an unpleasant loan situation. Refinancing to a lender with good customer service reviews may save you from a headache — on top of potential savings on interest.

However, even longstanding problems may not mean it’s time to refinance. If a prepayment penalty is attached to your current loan, it may cost more to refinance than you would save.

When to not refinance your car

Refinancing a car loan isn’t always the right choice, especially under these circumstances.

When you’re close to paying off your loan

If you are nearing the end of your loan term, refinancing may not save you money. Instead, you should stick with it unless you desperately need to extend your loan term to reduce your monthly payment.

Lenders have minimum and maximum balance thresholds to be eligible for refinancing. The minimum typically falls between $3,000 and $7,500.

Most lenders also have a minimum loan term of 24 or 36 months. If you have fewer months than that remaining on your car, you’ll have to extend your term when you refinance. Be wary. While a longer loan term will mean a lower monthly payment, you will also pay more interest.

When you owe more than the car is worth

The further you are in the loan, the more likely you owe more on the car than it is worth. This is also called being “underwater” or upside down — and it will make it hard to refinance. Since your car secures your loan, lenders know they won’t be able to recoup the loan’s full amount if you default while upside-down.

Bankrate tip

Don’t refinance a vehicle you can’t afford. Reassess your budget to see where you may be overextending and calculate expected costs before signing off on a new loan.

When interest rates are high

You may pay more if you refinance in the current market environment.

The Federal Reserve has been working to control inflation by keeping a high federal funds rate, which in turn causes interest rate increases on everything from credit cards to car loans. The average APR for used vehicles was 11.91 percent as of 2024’s first quarter, according to Experian.

If you have an average rate on your existing loan, a better rate may be hard to find.

When your car doesn’t meet lender requirements

Lenders determine eligibility differently. Before you refinance, check the requirements for you, your vehicle and your current loan. Most lenders will require:

• A regular source of income, a low debt-to-income ratio and good credit.
• Proof of residence, such as a lease agreement, mortgage statement or utility bill.
• Your car’s make, model, year, vehicle identification number (VIN) and mileage to evaluate your car’s worth.
• Your loan’s current balance, monthly payment and payoff amount to determine if you meet its minimum loan requirements.

Finally, the car should be no more than 10 years old — some lenders limit the maximum age to eight — and the mileage should not exceed 100,000 or 150,000, depending on the lender.

Bankrate tip

You can find specific refinancing requirements on lenders’ websites or Bankrate’s lender reviews.

When fees will outweigh your savings

Before refinancing, consider whether fees will impact your overall savings. Some auto loans have a prepayment penalty in place, which means paying off your loan early can cost you more than you would save by reducing the interest rate.

Some lenders also charge a substantial origination fee when you take out a loan to refinance. Like a prepayment penalty, it can eat into the potential savings and make refinancing more of a hassle than just sticking with your current lender.

Both your old and new lender may charge transaction fees, covering administrative or processing costs for terminating the old loan and starting the new loan agreement. You may be able to negotiate these fees. Some states will charge you state registration and title transfer fees for re-registering your car following refinancing.

The bottom line

The primary reason to consider refinancing is if you can qualify for a lower rate and will save money in the long run. Consider how long you have on a loan before proceeding with a refinance. Your savings may not be insignificant if you’re too far into the loan.

If refinancing is too expensive, you still have options. You could be better off requesting a car loan modification with your lender if your car payments are stretching your budget too thin or you’re experiencing financial hardship.

Determining when to refinance car loans is more complex than it seems. Refinancing your car loan involves swapping your current loan for a new one with different terms. But there are more factors to consider than just picking a new lender. Whether it’s a good time — or a bad time — depends on the market, your finances, the state of your loan and the car itself.

For example, if rates have dropped and you can secure a lower one, refinancing might be an excellent choice. Also, while not ideal, refinancing to a longer term could make sense if your income has taken a substantial hit.