How Soon Can You Refinance a Car Loan After Purchase?

How Soon Can You Refinance Your Car?

You may be able to refinance your car loan as soon as the car title is transferred to your original lender, but some lenders won't refinance until you've had your loan at least six months. Here's a closer look at different times you might want to refinance your vehicle.

Within the First Three Months

You can't refinance a loan until the car title transfers to your initial lender—a process that can take 60 to 90 days. Depending on when your title transfers, you may be able to refinance your auto loan within the first three months. However, some lenders won't refinance a loan until six months are up. What's more, waiting at least six months between loan applications is generally a good idea, as more frequent applications for credit can have a negative impact on your credit score.

If your credit score has substantially improved—say, your score went from fair to good—or if interest rates have dropped significantly since you bought the car, it may be worth trying to refinance within the first three months. Otherwise, you're probably better off waiting a bit. Use that time to research potential lenders and continue improving your credit score to put yourself in the best possible position when you choose to refinance.

Six Months Into the Loan Term

There are a couple of reasons it can be wise to wait until the six-month point before trying to refinance your car loan.

• You'll have a wider range of loan options. Not all lenders will refinance loans less than six months old. Waiting six months gives you more lenders to choose from.
• Your credit score should have recovered from your original loan application. When you apply for credit, lenders perform a hard inquiry into your credit report. Hard inquiries cause your credit score to drop slightly, but it should bounce back after a few months if you're making your payments on time.

Two Years Left on the Loan Term

It's generally best to refinance while your loan term has at least two years left. In fact, some lenders won't refinance a loan that has less than two years remaining. Depending on the length of the loan term, your car may also be too old or have too many miles on it to meet lenders' refinancing eligibility criteria.

Auto loans are typically amortized, meaning a larger percentage of your monthly loan payment goes toward interest at the start of the loan term. Once there are less than two years left on your loan term, you've already paid most of the interest on the loan, so refinancing may not save you much money. Lender fees for the new loan can also eat into any savings from refinancing.

Learn more >> When Does It Make Sense to Refinance a Car Loan?

When Should You Refinance?

You may want to refinance your car loan in the following situations.

• Your credit score has improved. Perhaps you've paid off high-interest credit cards and reduced your credit utilization ratio, increasing your credit score since you bought the vehicle. A boost in your credit score could qualify you for more favorable loan terms and a lower interest rate than you originally received.
• Interest rates have gone down. The Federal Reserve's federal funds rate affects the prime rate lenders use to set interest rates for loans. Even if your credit score hasn't changed, a drop in the prime rate could open the door to refinancing your auto loan at a lower interest rate.
• You have positive equity in the car. If your vehicle is worth more than your outstanding loan balance, you could tap the equity with a cash-out auto refinance. You get a loan for more than your current auto loan (ideally with a lower interest rate) and use the difference for other things, like paying down credit card debt.
• You want to lower your monthly payment. Are you having trouble making your car payments? Refinancing into a lower-interest loan could reduce your monthly payments. If you can't qualify for a lower interest rate, you can lower your payments by refinancing into a loan with a longer repayment term. Keep in mind, a longer loan term ultimately costs you more in interest, but if it's your best option for keeping the car, it may be worth the expense.

You can use Experian's car payment calculator to compare refinancing options with different loan amounts, interest rates and repayment terms. This will help you determine whether refinancing makes financial sense for you.

Learn more >> Should I Refinance My Car?

What to Consider Before Refinancing

Refinancing an auto loan can be a smart move in the situations above, but there are some downsides to consider before moving forward with your loan application. Here are some questions to answer if you're thinking of refinancing:

• Do you have negative equity in the vehicle? If your car is worth less than your outstanding loan balance, you have negative equity (also called being upside-down or underwater on your loan). You may be able to refinance your car, but you'll need to pay your original lender the difference as a lump sum to get out of your loan.
• Does your loan have a prepayment penalty? Some auto loans charge a percentage of your loan balance if you repay the loan in full before the term ends. If your loan has a prepayment penalty, you'll need to determine whether the savings from refinancing outweighs that cost.
• How old is your car and how much mileage does it have? Many lenders won't finance a vehicle with over 100,000 miles on the odometer or one that's 10 years old or more.
• Are there fees for refinancing? For example, some lenders charge origination fees for processing your loan. Weigh these costs against any possible savings.
• Do you expect to apply for another loan soon? Since loan applications can temporarily ding your credit score, it's best to avoid new credit applications in the months before applying for a mortgage, home equity loan or other major loan.
• Have you missed any car payments? Payments that are 30 days past due may be reported to credit bureaus. A single late payment can do serious damage to your credit score and will stay on your credit report for seven years. If you've already missed car payments, you may not be able to qualify for refinancing.

How Many Times Can You Refinance a Car Loan?

You can refinance a car loan as many times as you can qualify. Just keep in mind that refinancing too frequently could negatively affect your credit score. Whenever you replace your old auto loan with a new loan, the average age of your credit accounts decreases. Although the average age of accounts isn't the most important factor in your credit score, a lower average can still have a negative impact over time.

The Bottom Line

Refinancing a car loan can be a smart move if you're able to nab a lower interest rate. However, you'll typically want to wait at least six months after getting your initial loan and avoid refinancing too often, which can lower your credit score.

If you're considering refinancing your auto loan, check your credit report and credit score first and take steps to improve your credit score if need be. Experian's free credit monitoring service can track your progress for you. Good credit can make it easier to refinance your auto loan with more favorable terms, saving you money on interest payments.