When Is The Best Time To Refinance Your Car Loan?
When it comes to making the most of your money, getting the best terms on your car loan is probably close to the top of your list of priorities. With that said, you might find look into auto loan refinancing, but that begs the questions: How do you really know when to refinance a car and when to stick with your original loan?
In this article, we'll discuss what refinancing is and when it can benefit you, like when your credit score improves, when you need a lower monthly payment, or when your financial situation has changed. We'll also touch on a few important caveats you should consider before taking the leap into refinancing.
If you think refinancing your car might be the best option for you, give the Credit Union of Southern California (CU SoCal) a call today at 866.287.6225 for a no-obligation consultation with our financial experts.
How Car Refinancing Works
Before you jump into refinancing, you need to understand how it works. This will help you make an educated decision on whether it's the right choice for you and your financial needs. When you refinance a vehicle, you are taking out a new loan from a lender that will pay off your existing auto loan. Then you are responsible for paying back the new loan in monthly installments.
Ideally, you'll be getting a loan with better conditions, such as a lower interest rate or lower monthly payments, which could save you money in the long run.
For more information on what you need to get started, check out our article on How to refinance a car
with CU SoCal.
Pros & Cons of Car Refinancing
Because you'll be refinancing for a better loan, you're likely to see a reduced interest rate (especially if your credit score has improved) or lower monthly payments. Another great aspect of refinancing is that it could improve your cash flow if you refinance for more than you owe on the existing loan or opt for a longer term. Being able to consolidate debt if you have two or more vehicles you have loans on is also a valuable part of refinancing.
However, there are a few disadvantages that come along with car refinancing as well. Refinancing can come with extra fees due to new loan applications and early closing fees. Additionally, you could end up paying more in interest costs if you refinance for another term, so you could be paying more than your car is worth.
For a more detailed explanation of what to look out for, check out our in-depth guide to the Pros and cons of car refinancing
What You'll Need to Refinance
Before you can begin the refinancing process, you'll need to gather a few items that will help the process go much more smoothly. From finding new loan terms to collecting information about your vehicle, making sure you're prepared before you apply for a new loan is the best way to start on the right foot. Here's what you need:
Loan With Better Terms
First, you need to find a new loan with better terms. Refinancing only makes sense when you're able to get a better deal than what your existing loan currently offers.
Details About Current Loan
Gather the details about your existing loan. These include who your current lender is, your account number with them, and how much you still owe on the loan. This will help both you and your new lender find the best new refinancing loan.
You most likely submitted car details, like the make, model, year, and VIN, for your original loan, but you'll need them again for refinancing. This will indicate to the lender how much the car is currently worth so they can determine the proper loan amount.
Pay Stubs & Tax Returns
To get the best terms on your new loan, you'll need to provide proof that you have an income that will allow you to reliably pay back the loan. Pay stubs, tax returns, and other evidence of financial stability will be helpful for lenders to see you will be a good borrower.
When You Should Consider Refinancing Your Auto Loan
If you're not completely satisfied with your current loan, refinancing can be an excellent opportunity. After all, refinancing should improve your financial situation. So, the short answer to your question of “when can I refinance a car” is whenever the new loan saves you money. Here are some indicators that it might be the right time to think about car refinancing.
You Want A Better Interest Rate
Let's say that when you first purchased your vehicle, you didn't have excellent credit. You most likely were only able to get a loan with a pretty high interest rate since you were more of a risk to lenders.
But if you've been consistently making your payments on time, your credit score has probably improved. In that case, it's time to take advantage and refinance with a loan that has a better interest rate. With a great credit score, you'll have more options for loans with a lower interest rate.
Need some help improving your credit score? Check out the CU SoCal Credit Builder Loan
for a quick and easy way to increase your credit rating.
You Want To Change Lenders
Whether you financed your car through a bank, dealership, or somewhere else, you might not be entirely happy with your lender. Perhaps the interest rate is too high, the payments or complicated, or you're just not getting the right kind of service. If that sounds like your situation, it could be worth it to refinance to change lenders.
You Want Lower Monthly Payments
If you've come into recent financial difficulties like a pay cut or extra monthly expenditures, you're probably looking for ways to cut costs. One way is to lower your monthly payment by refinancing for a longer term. This can be helpful right away, but be careful that you don't end up paying more on the loan than your car is worth.
Your Current Loan Has No Prepayment Penalties
Many lenders have an early closing fee or a prepayment penalty. This means that if you finish paying off the loan before the term is up, you end up paying extra costs to cover the lost interest. If your current loan has a prepayment fee, refinancing may not make financial sense.
The Best Time to Refinance Your Auto Loan
So, when is the best time to refinance a car? If you've considered the items above and think that refinancing might be right for you, there are certain things to look out for when deciding when
to proceed with the process. There are two main points to weigh up. If they are true for you, it's probably time to refinance.
Your Credit Score Has Improved
As we mentioned above, an improvement in your credit score is a good sign that refinancing your car is a great idea. If you've been making payments on your current auto loan on time every month, your score most likely has improved – as long as you have been doing the same for any other loans you have. If this is the case, refinancing will most likely save you money through lower interest rates.
However, if you're not quite ready to refinance because of credit, here are some ideas for How to improve your credit score
You're Currently Not Upside Down on Your Car Loan
Cars are notorious for depreciating quite quickly. In fact, a brand-new car drops in value by around 20% within the first year, and then another 15-25% each year after that for the next four or five years. When you're refinancing, you don't want to end up owing more on the loan than your car is worth.
If your car is only a couple of years old and is worth more than the remainder of your existing loan balance, it's a good sign that it's time to refinance.
Mistakes to Avoid
As with any financial process, you want to make sure to cover your bases and avoid mistakes that could make your refinancing goals disappear. As long as you can make your payments and refinance at the right time, you should be fine. If not, you could run into some problems. Here's what to watch out for.
Stretching Your Loan Term
Refinancing for a longer term may sound like a great idea. Indeed, it can be beneficial if you need to lower your monthly payments due to an emergency. But don't forget that the longer you're paying off a loan, the more money you'll be spending on interest costs. Don't be fooled by the low monthly installment – a longer term means more money spent overall.
Waiting Too Long To Refinance
Owing more money on your loan than your car is worth is known as being "upside down" on your loan, and it is something you should avoid at all costs. If you wait too long to refinance, this becomes more of a possibility, which means the lender could deny you refinancing altogether. Many lenders refuse to finance vehicles that are too old, so waiting too long could mean your car ages out of any potential loans. And if a lender does agree to refinance your older vehicle, you'll likely get higher interest rates and worse overall terms.
While in most cases the lender will take care of transferring the loan and paying off the original one, you should stay vigilant to make sure that this is the case. As long as you stay on top of the transfer process and continue to check in with both lenders, you should remain in the clear. However, if you don't keep track of the payments, the lender might penalize you with late fees. You also might see a drop in your credit score for late or missing payments.
CU SoCal Auto Loans
Refinancing a car loan may sound like a complicated process, but with CU SoCal, it doesn't get any easier. We've been making it possible for our members to get on the road for the last sixty years, so we know our stuff. With up to 120% financing, quick preapprovals, and zero application fees for members, we're the experts in auto loans for Southern Californians. If you're ready to learn more about how we can help you refinance your car, check out our CU SoCal auto loans
Apply For A CU SoCal Auto Loan Today!
If you're still asking yourself when you should refinance a car, there's no better time than now to check in with the financial experts at CU SoCal. In fact, bring your auto loan to CU SoCal and we'll lower your current rate by at least 2% APR! Give us a call today to learn more, or click here to learn more.