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Refinancing your car loan can save you money by lowering monthly payments and reducing interest costs. But timing is crucial, given unpredictable interest rates and shifting market conditions.
The best time to refinance a car loan is typically when your credit score has improved, interest rates have dropped or you owe less on your loan than your car is worth.
In this guide, we’ll explore the ideal — and less-than-ideal — times to refinance. For a deeper dive, you can also check out our auto loans resource hub.
There is no specific time of year that is best for refinancing a car. But it can make sense to refinance when your credit score improves, interest rates fall or your loan balance is less than your car’s value.
However, while refinancing can lower your payments, it can also extend your loan term, meaning you may pay more interest in the long run. Always thoroughly weigh the pros and cons of refinancing your auto loan before agreeing to your new loan terms.
Let’s explore how to weigh these and other key factors when deciding on the right time to refinance.
One of the best times to refinance your car loan is when your credit score improves. Lenders view borrowers with higher credit scores as less risky and may offer them better rates.
If your credit score has improved significantly since you took out your original loan, you might qualify for better refinancing terms, such as a lower interest rate or reduced monthly payment.
But don’t overlook the potential consequences of taking on a longer loan term, as you may end up paying more in interest over the life of the new loan than you would have by sticking with the original one — even if your improved credit score lands you a lower rate.
You can boost your credit score by paying down debt, reducing your credit card balances, making timely payments or resolving discrepancies in your credit report.
If you’re unhappy with your current lender, refinancing can be a way to work with a lender you’re more comfortable with. You may be dissatisfied with your current lender’s substandard customer service, hidden fees, uncompetitive rates or rigid repayment options.
Switching from a bank to a credit union, for example, could provide you with more favorable terms and a deeper sense of community. Whereas credit unions are nonprofit, member-owned cooperatives, banks are for-profit corporations.
Credit unions also tend to charge lower interest rates on loans, though you might face membership eligibility requirements. On the flip side, banks typically have less restrictive membership requirements and tend to offer a more well-rounded digital experience, such as more robust mobile apps and online platforms.
The right lender for you depends on your comfort level, unique financial situation and which offers the most favorable terms.
An interest rate is the cost of borrowing money, expressed as a percentage of the loan amount. This is your annual percentage rate (APR). Rates fluctuate with changing economic conditions. When they fall below the rate of your original loan, it can make sense to refinance.
A lower rate could also mean reduced monthly payments and less interest paid over the life of the loan. But if you refinance for a longer loan term, you may end up paying more interest over time, so review loan terms carefully before signing any documents.
Positive equity means your car is worth more than the remaining balance on your loan. Lenders view positive equity as less risky, as it demonstrates that your car is an asset. That can increase your chances of securing a favorable refinancing rate.
Refinancing with positive equity can improve your savings over the life of the loan, possibly resulting in reduced interest or more favorable loan terms.
If you have difficulty keeping up with your monthly car loan payments, refinancing could be a way to lower these payments.
Changes in circumstances, such as job loss, medical expenses or unexpected financial burdens, cause some borrowers to reevaluate their loan terms. Refinancing can sometimes help you secure lower monthly payments or more flexible repayment schedules.
However, it’s important to also consider potential drawbacks. A lower monthly payment might relieve short-term financial pressure, but extending your loan term generally means paying more interest over time.
Refinancing can be a smart financial choice, but there are situations when it’s best to stick with your existing loan.
For example, millions of Americans face financial challenges with their auto loans. In late 2024, one-third of those with financed vehicles carried negative equity, meaning they owe more than their cars are worth.
Let’s review negative equity and other scenarios when refinancing might work against you.
If you have a low credit score or it has dropped since you took out the original loan, refinancing your car loan might not be the best choice.
Lenders sort borrowers into credit tiers, and a lower score can lead to higher rates and less favorable terms. This, in turn, may make it harder to find a competitive refinancing deal.
Before refinancing, consider taking steps to improve your credit score by paying bills on time, reducing debt and checking for errors on your credit report.
Being “upside down” — also called negative equity — on your car loan means you owe more than the vehicle is worth. This can make refinancing difficult, as lenders are often reluctant to refinance a loan that exceeds your car’s value.
Refinancing while upside down can also bring higher interest rates and other unfavorable terms. This is a key metric in determining if refinancing is the right choice for you. Therefore, it’s crucial to accurately assess your car’s value relative to your loan balance. Online auto valuation tools are a good place to start with your research.
If you recently bought your car, refinancing right away might not be worthwhile. When you take out a loan, your credit score may temporarily dip due to the new debt or a “hard credit inquiry.”
A hard inquiry occurs when you apply for new credit and a lender reviews your credit file to assess your financial health. It will usually drop your credit score by a few points. Further, your overall credit profile may look riskier to lenders because you've recently taken out other loans.
Waiting for your credit score to stabilize or improve could help you secure a more favorable interest rate or loan terms.
Prepayment penalties are fees charged by some lenders if you pay off a loan early. When you refinance, you pay off your existing loan with a new one, and some lenders may impose fees to recoup the income they would otherwise lose. This may reduce your potential savings with a refinance.
Check your loan agreement to make sure the penalty doesn’t outweigh potential savings from a lower rate or reduced payment.
After considering if it’s the best time for you to refinance, you can begin the application process. Here are four steps you’ll follow:
You can always check our auto loan refinancing calculator for an instant estimate of your potential savings.
The following frequently asked questions can help you decide if it’s the best time to refinance your car loan.
The best time to refinance a car loan isn’t defined by the calendar. Optimal timing will largely depend on your credit score and market conditions, such as interest rate trends. Keep an eye on these factors to find the right moment to refinance, as they fluctuate through the year.
It may be better to delay refinancing if your credit score has recently dropped, if you’re upside down on your loan or if your current loan has prepayment penalties. These conditions can lead to higher interest rates and unfavorable terms. Also, refinancing near the end of your loan term can minimize your savings.
If your credit score has dropped since you took out your existing loan, refinancing might not be ideal. Lenders tend to offer higher interest rates to those with lower scores. Consider improving your credit score first to qualify for better refinancing terms.
What is the best time to refinance a car loan? Explore the key factors that indicate it might make sense to seek a new auto loan.
