The Best (and Worst) Time to Refinance Your Auto Loan

Car payments are a necessary part of life for many. With the average monthly car payment of $463, as of April 2016, car payments take a big chunk out of a monthly budget. Refinancing your auto loan is a great way to reduce that burden and free up extra money for other responsibilities.

However, a refinance does not always make sense. If you’re wondering when the best time to refinance your auto loan is, consider some of the following items first.

The Best Time to Refinance Your Auto Loan

Refinancing an auto loan is generally much simpler than refinancing a mortgage. You have less paperwork and significantly less fees – if any, to do so. The biggest benefit to refinancing your auto loan is simple – you get to save money and possibly pay off the car quicker.

Here are some instances where it makes sense to refinance your auto loan:

- You have a poor interest rate. Interest rates are fairly low today. That may not have been the case when you took out your loan. If you have a poor interest rate and can lower it by a few percentage points, you may end up saving thousands of dollars on the loan.
- Your finances need help. Have your finances taken a turn for the worse? A lower car payment is one way to alleviate that problem. Refinancing your auto loan can result in lower payments, albeit with a potentially longer loan.
- Your credit score is healthier. Did you have a less than stellar credit score when you first bought the car? An increased credit score is one of the best occasions to refinance your auto loan, especially if your new score is over 720.
- You’re making more money. Have you changed jobs or are you making more money through another source? This is a great opportunity to refinance your car loan. The lower rate, combined with your ability to pay more will be a great combination to pay off the loan faster.
- You want to change the loan term. More are taking out longer car loans, up to 84 months in some cases. One of the best times to refinance your car loan is when it allows you to shorten the auto loan term. It may result in higher payments, but you’ll pay it off quicker.

The best time to refinance your auto loan comes down to one thing – saving you money in the long run to ultimately put yourself in a better position financially.

The Worst Time to Refinance an Auto Loan

The biggest benefit to refinancing a car is saving money. Unfortunately, refinancing a car may not always make sense. Here are some of the worst times to refinance an auto loan:

- When you have an older car. Many banks don’t want to refinance a depreciating asset. This makes it difficult to refinance an older car. Consider a P2P loan or trading in the car instead.
- If your car is underwater. In most instances, a bank will not lend you more than the car is worth. If you’re close to breaking even, consider making extra payments to put you in a better position for a refinance.
- You’ve recently bought the car. Did you just buy the car in the past year? If so, a refinance does not make sense as you likely will not see significant savings.
- You have pre–payment penalties. You won’t see this with all auto loans, but some have pre-payment penalties. If it negates the savings, then it may not make sense to refinance.
- You need quick cash. Again, a car is a depreciating asset. Life is unpredictable, and you may need access to quick cash. A cash back auto refinance sounds tempting, but it’s not worth the extra debt. Find a way to make extra money or take out a personal loan to lower your debt payments.

You will notice a common theme among the worst times to refinance your auto loan. In many instances, it’s due to a larger, underlying issue. Focus on that first then tackle lowering your car payment.

The Goal of Refinancing a Car

The goal of refinancing your auto loan should come down to one thing – saving money and owning the car outright sooner. A car serves a need in many areas, but it’s also a depreciating asset.

Your life may have changed since taking out the car loan or the interest rate climate may have changed. Regardless of the situation, the goal is keeping more money in your pocket. Just make sure to shop around and compare multiple options to get the best available deal.

Bottom Line

Refinancing your auto loan may not always make sense. Do your due diligence to secure the best situation for your needs.

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