Can You Refinance A Car Loan Shortly After You Purchase It?

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You might consider refinancing your auto loan if you’ve found a lower interest rate or better repayment terms than what you’re paying now. In most cases, you can refinance your car loan any time you want, but that doesn’t mean you always should.

Here’s more details on when you can refinance a car loan, what the requirements are and whether it’s the right move for you.

Can I Refinance a Car Loan?

If you took out an auto loan, you can probably refinance it. Keep in mind that there are some instances where you might not be ready to refinance your car loan just yet, however. Before you decide to refinance, you should make sure to do the following:

Read the terms and conditions

Refinancing an auto loan is like refinancing any other type of loan: a new loan is taken out to pay off your existing loan, and then you make payments to your new lender. If your current lender has prepayment penalties, that means you could get hit with a charge if you pay off your existing auto loan before the prepayment terms are up.

You might be able to skip out on the prepayment penalty if you wait a little bit longer to refinance—so check your lease terms and do the math. If the penalty amount is higher than what you’d save when you refinance, it might not be worth it. Not all lenders have this penalty, however, so it’s critical to view your loan terms first.

Find out the new lender’s requirements

If you’re planning to refinance with a new lender, you might have to meet some minimum requirements first.

  • Credit score: When you took out your original loan, your credit score took a hit from the hard credit check. If it hasn’t rebounded back, you might not qualify for a loan with a new lender or if you’re approved, it might be at a higher interest rate than your current loan.
  • Minimum loan amount: Lenders require a minimum amount that you can borrow. If the amount you’re refinancing is below that minimum amount, you won’t be eligible to take out an auto loan.
  • Repayment period: Many lenders have a minimum repayment period, like three or five years. If you’re set to pay off your loan in the next year or two, it might not make sense to refinance your loan, even if you’re eligible. You could end up paying your loan for longer than you need to, which means you’ll pay more in interest overall. It also means you’ll be paying back a car that’s losing resale value.

How Soon Can I Refinance a Car Loan?

You might be able to refinance your car loan within a few weeks of buying it, but it depends on where you bought your car, your lease terms and the new lender you’re considering for refinancing.

Since paperwork can take a while to process, you might want to wait until you’ve made at least your first payment to your new lender. This helps you avoid missing any payments so you can stay current on your loan and your credit score doesn’t take a hit due to late payments.

When You Should Refinance an Auto Loan

If you’re thinking about refinancing your car loan, it makes sense if:

  • You have great credit. The higher your credit score, the lower your potential new interest rate will be and the more likely you are to qualify for the best repayment terms.
  • The interest rate is low. For refinancing to make sense, the interest rate should be lower than what you’re paying now. This will also lower what you pay over the life of the loan and, in some cases, might reduce your monthly auto loan payment.
  • You meet eligibility requirements. Not all lenders have the same requirements, so to refinance, you should make sure you’re eligible first. In addition to having a good credit score, you should also make sure you meet any other qualifications.

When You Shouldn’t Refinance an Auto Loan

On the other hand, you might want to avoid refinancing if:

  • The new interest rate is higher. If you can’t get an interest rate that’s lower than what you’re currently paying, refinancing isn’t worth it.
  • You’re making other big purchases soon. If you’re planning to buy a home within the next few months, refinancing your auto loan triggers another hard credit check and increases your debt-to-income (DTI) ratio. These things matter to mortgage brokers and underwriters when going through your paperwork to preapprove you for a home loan. So, it’s best to avoid refinancing if you’re planning on taking out another loan.
  • Your loan is more than the car’s value. If you can only get a loan for more than what the car is worth, refinancing doesn’t make sense.
  • You’re late on payments. Refinancing makes sense if you’re up-to-date on payments. But if you’re delinquent or at risk of default, you might not qualify for refinancing.

Related: What Is The Average Car Payment?

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Frequently Asked Questions (FAQs)

Will refinancing hurt my credit score?

Refinancing will trigger a hard credit check, which causes your credit score to temporarily take a dip. This normally rebounds after a few months of on-time payments, though.

Should I refinance my car loan?

You should consider refinancing your car if you have good credit, are guaranteed a lower interest rate than what you’re paying now or can get more favorable terms. Also, make sure you’re eligible to refinance before completing an application.

You may want to skip refinancing, though, if you face a hefty prepayment penalty with your current lender, your credit score hasn’t rebounded from when you took out your latest auto loan or you can’t get a better interest rate.

If you’re planning to take out another loan soon, like a mortgage, it’s likely best to skip refinancing for now. Refinancing your auto loan will temporarily drop your score, causing the interest rate you get on a mortgage to be higher than it would be otherwise.

Can you refinance a car loan with bad credit?

There’s a chance you might qualify for refinancing with bad credit, but that doesn’t mean you’ll get a lower interest rate than what you’re paying right now. Try to improve your credit score before refinancing so you qualify for the lowest interest rate and the best terms for your needs.

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