Have you thought about refinancing your car loan, but you’re unsure when you can take out a new loan? The good news is that you can actually apply for refinancing at any time. However, before you do, make sure you know and understand how it works and the effects refinancing will have on your financial situation. Let’s dig deeper.
When Can I Refinance My Car Loan?
The First 60-90 Days
Within the first two to three months, it might sometimes be considered to be too early to take out a refinancing car loan. Many lenders do not consider refinancing applications if the title has not been transferred to the current car finance company so make sure that has happened. If you are sure about getting a refinancing loan, you may want to shop around to get the best deals, and do prepare for your refinance application.
Another thing to be aware of is that your current lender had just performed a hard enquiry on your credit report when they assessed your car loan application. This means that the hard enquiry would have caused some points to be knocked off of your credit score. It’s nothing to be worried about because it’s only temporary and will bounce back eventually. But if you apply for refinancing too soon, your credit score won’t be in its best shape, and you might only get offers of deals with higher interest rates. It’s wiser to wait so you can allow your score to recover. A better score will mean lower interest rates.
Six Months In
Once you’re already six months into your car loan, it’s more likely that your credit score will have improved, more so if you’ve been paying in full and on time for the past six months. If you’re looking to refinance your car loan so you can get a better deal with lower monthly repayments, continue being a good payer so that it reflects on your credit score. A higher score will allow you to qualify for car loans with better rates.
What if you don’t have a very good track record when it comes to paying loans, or it’s your first time financing a car? In this case, try to wait more than six months, ideally, a full year before you get another car loan. One year will give you enough time to prepare your application by building a good payment history. So if you are waiting for your credit score to go up, 12 months into your current loan is a good time. However you might already have a good score and have just found a great deal with lower interest rates - so you can opt to refinance at any time in that case!
Two Years Remaining on Your Loan
If you want to maximise the benefits of refinancing your car loan, you want to have at least two years remaining in your current agreement. A majority of the car loan interest is actually paid during the first part of the agreement, so you’ll save more if you choose to refinance your car loan early on.
A lot of lenders also have certain requirements that need to be met if you apply for refinancing at a later time. It’s going to differ from one car finance company to the next, but typically, they’d ask how many months are left in your agreement, the amount you still owe, and the vehicle’s age and mileage, among others. The car would need to be worth more that you wish to borrow! Before you apply for refinancing, be sure to ask the lender about any specific requirements you have to fulfil too.
Should I Refinance My Car Loan?
Refinancing a car loan is an important decision to make, so you have to take the time to consider the pros and cons. Here are some factors to watch out for so you’ll be better guided when making your decision to get another loan.
Interest Rates Have Dropped
Check the current interest rates and compare that with the rate when you took out your current car loan. If it’s lower now, like two to three percentage points lower, then you have a better chance of saving money when you refinance.
Reduced DTI Ratio
There are several factors that lenders consider before they decide what interest rate to offer you. One of these factors is your debt-to-income (DTI) ratio. You can get the DTI figure when you divide your monthly income by the monthly payments for loans. If you’re in a better financial situation and you’ve managed to pay off a good number of debts, this lowers your DTI ratio. With this, you might be able to get better rates and terms on your second car loan.
Look for Better Deals
Say the interest rates didn’t drop significantly, or your DTI is more or less the same, it’s still worthwhile to shop around for better car loan deals. Many first-time drivers get their first car loan from the dealer and find out later that the interest rate they got was higher than what other lenders were offering. If this is the case for you, then try finding better deals and plan out your application for refinancing so you’ll have the best chance of saving money doing so.
Cheaper Monthly Payments
Are you having trouble making payments on the car? Refinancing is a good option if you want a more affordable monthly repayment amount. When you get a second car loan, you can choose a longer contract term to help reduce the amount you need to make for your monthly payments. Just bear in mind that longer repayment terms also mean paying more interest overall if you look at the big picture. But if your goal is to have lower monthly payments, then refinancing can help.
How do I terminate my existing car loan?
Don't worry too much about doing this as the new lender will take care of all this for you. They will pay off your existing loan directly. But do check out with your old lender what fees might be involved too - and compare this to what you might save in interest overall. You will definitely need to get an early settlement figure from your existing lender before you can apply to the new lender too as they will need to know this in order to give you a decision.
Whilst you may refinance your car at any time, there’s that sweet spot for it when you can maximise the benefits of getting a new car loan. If you can get a better deal then it's usually better to go early to maximise the savings. The new lender will need to value your car and check the model and age etc., to see if it has a higher value than your borrowing, and then check the amount you wish to borrow to close the old loan, so they can check you can afford the re-payments. Then it's simple for them to pay off your old loan and start a new one.