best time to refinance your car

When Is The Best Time To Refinance A Car?

September 27, 2018 BY AFFCU in

Investing in a car loan provides an opportunity to obtain new loan terms for your vehicle.

Many times, it can open the door for potential savings, or it can help you reduce how much you have to pay towards your debt.

Factors Affecting When Is The Best Time To Refinance A Car

In every situation, a car refinance should be a thoughtful decision based on numerous factors including your goals, your credit score, and your current needs.

When it comes to timing, there are a few careful factors to consider.

Do You Qualify to Refinance?

Some people may not be able to refinance.

While credit and income play a role in this decision, there is also the need to look closely at your existing loan to determine if refinancing is even possible.

Some lenders place prepayment penalties on the loan. If this is in your contract, it means you will need to pay a fine to refinance. Most prepayment penalties apply to the first few years of the loan term. If you are beyond this, then a car refinance may be an option.

Not all loans carry these penalties.

How Much Equity Do You Have?

Another key concern has to do with equity. This is the amount of value you have available to borrow from.

To determine how much you have, find out the current value of your vehicle. Then, subtract how much you owe on your existing loan.

For example, let’s say your vehicle is worth $15,000 right now. You owe $8,000 on it. This creates $7,000 worth of equity. You may be able to borrow from this $7,000 for your other financial needs.

On the other hand, if you do not have a lot of equity, you may not be able to refinance. A common situation occurs when the car is just purchased. There may not be enough debt paid down off the existing loan to free up equity.

Yet another setback here has to do with depreciation. Vehicles depreciate in value very quickly during their first two years. This is often much more than you will pay down on the loan. This means the worth of your car during that time may be less than what you owe.

What Are Current Interest Rates?

Interest rates are the costs of buying a car.

You can find this information by checking the details for your loan. Your existing lender can offer information, too.

Now, consider how much an interest rate may be for you right now. Auto loan interest rates can range widely. While you can obtain a basic rate quote online, it is best to contact your lender directly. Then, ask what type of loan is most likely for your current situation.

Your credit score, the value of the car, and factors such as promotions impact this information.

How Is Your Credit Score Right Now?

Credit scores matter when it comes to obtaining a new loan. Many times, you may benefit from refinancing right now if your credit score has significantly improved.

Let’s say you had no credit or a low credit score when you purchased your car. But, you’ve spent the last few years working to build it up. Now that you have a good credit score, applying for a car refinance may help you get a significantly lower interest rate.

In this case, it may save you a significant amount of money over the lifetime of your loan.

Do You Have a Financial Need to Extend the Life of the Loan?

Another factor to think about when refinancing is your need to do so.

You could be facing a situation where you need to pay less on your monthly bill. If this is where you are right now, consider the value of refinancing.

Sometimes, you can get a lower interest rate or extend the length of the loan. In both cases, you will reduce your monthly payment. In some situations, this is ideal, but it can also add cost to the loan in the long term.

What Is the Age and Value of Your Car?

Not all cars qualify for refinancing.

When a lender provides you with funds for a loan, they need to make sure their investment is a wise one. For this to happen, the value of the car must be high enough now as well as at the end of the loan term.

The lender may require an appraisal of the car to determine its value. This includes verifying your ownership of the car, its age, and details, along with the condition.

Is Your Loan Underwater?

You may not be able to refinance if your loan is underwater.

As noted previously, if you owe more on the loan than your car is worth, the lender is not likely to offer a car refinance. This can happen at the start of the loan (most commonly) or if you have rolled negative equity from another car loan into this one.

In all situations, your first step is to contact your lender to determine if a loan is possible and what terms apply. If right now does not seem like the best time to refinance your car, speak to your lender about what you can do to improve conditions for a few months from now.

How To Know The Best Time To Refinance Your Car

If you have an auto loan, first know that in most cases you’re not stuck with your original loan.

However, understanding how timing plays a part is important to ensure it’s the best time to refinance your car.

Car refinances may be able to save you money, reduce the time it takes to pay it off and even allow you to open up funds to go elsewhere in your budget.

Learn more about auto refinancing