How To Know If It’s Time To Refinance Your Vehicle

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Credit Knocks guest contributor. See guidelines.

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If you’re paying off an expensive car loan, you might be able to get a new loan on better terms by refinancing your vehicle.

The key, however, is knowing when’s the right time to refi, otherwise, you could do yourself a disservice and wind up paying more in the long run.

Not sure how to tell if now’s the right opportunity to refinance?

We’ll cover the what, when, and why about auto refi to help you make an informed decision.

What Does It Mean To Refinance A Vehicle?

Let’s start with the basics. Refinancing involves taking out a new loan to pay off a current one. Car loans offer a form of financing, similar to a mortgage on a house, that can be refinanced by a different lender.

They satisfy the old, outstanding balance and then issue a new loan for you to repay—ideally, one that comes with better terms.

 To refinance a car, you’ll need to research different banks and lending institutions to find the most appealing option. Then, you’ll need to prepare all your financial documentation and submit a new loan application.

But before you start filling out all the paperwork, make sure it’s the right time to refi.

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When Is The Right Time To Refinance My Vehicle?

There are certain situations that may indicate a great refinance opportunity. Here are several situations that can point you in a positive direction:

Your Credit Score Has Improved

If your credit was weak at the time you first applied for the car loan, chances are pretty likely that you received a high interest rate.

Lenders look at your credit score—or, a numerical representation of your past payments and present debts—to evaluate how likely and able you are to pay back the money you borrow.

A low score indicates high risk, so to offset the risk of default, lenders assess a higher interest rate to cover their potential losses.

Routinely paying your car loan on time every month might improve your credit, but there are many ways you can increase your credit score. Some examples include paying off student loans, getting out of credit card debt, decreasing your credit utilization ratio, and hiring a company to give you a boost.

If that’s the case, there’s a good probability that you will be able to refinance the loan through a different lender who can beat the steep rate.

Interest Rates Are Low

Lenders play a large role in determining your interest rate, but so does the government. The U.S. Federal Reserve regulates consumer loan rates, which then impacts auto loan rates.

They fluctuate based on the state of the economy; for example, in March 2020, when the pandemic hit, the Feds reduced the interest on consumer loans to 0-0.25% and car loans fell in response.

Considering the economic toll the coronavirus has had on American workers—which will continue to play out in the upcoming months—you might be able to catch the tailwinds of decreased rates and reduce the total borrowing cost with a refi.

Quick Tip:

Get pre-approved for a auto loan online before you go shopping for your new car. 

You Want To Extend The Loan Term

Most people hope to pay off their car as quickly as possible so they can get out of debt sooner rather than later. However, it might be in your interest to extend the length of your loan with a refinance to reduce your car payment and increase your cash flow.

For example, rather than paying off $5,000 in 48 months, you refi the loan and extend it to 60 months. This could lower your monthly bill by about $50, but keep in mind, you could pay more in interest over the lifespan of the loan, as the rate compounds each month.

You’re At Risk Of Default

If you’ve fallen on hard times and have trouble making your car payments, a refinance could help prevent the vehicle from being repossessed. If that were to happen, not only would you severely hurt your credit, but you would also lose out on all the money you had invested in the vehicle up to that point.

Even if you don’t receive a lower credit score, you may be able to extend the loan terms to lower the payment to give yourself some breathing room until you get back on your feet.

You Have Positive Equity

In some cases, you may have positive equity in the car, meaning the car is worth more than you owe on it. Every month you make a payment, equity increases, and the loan balance decreases. Let’s say you have a car worth $15,000 and you owe $11,000; that’s $4,000 in equity.

With a cash-out auto refinance, you can use the loan proceeds to repay the $11,000 and borrowing the remaining $4,000 to use as disposable cash. The vehicle is then held as collateral to repay the new loan, which may be able to help you achieve a lower interest rate while putting money in your pocket to afford a large purchase. 

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In a recent study at Credit Knocks, we found that *48% of clients who used a credit repair company got a credit score increase of 100+ points.

Consultation is quick, easy, and free.

Why Shouldn't I Refinance My Vehicle?

Refinancing can be a powerful tool for the right person at the right time, but there are some factors that indicate it’s against the borrower's best interest, such as:

You Have Prepayment Penalties

Some banks and lenders charge a fee for paying back the loan early. An auto refi involves one lease paying off and replacing another, so be mindful of the penalty you could face.

Your Credit Score Decreased

If your credit took a turn for the worse since your original application, take the time to improve your score before trying to refinance. Otherwise, you may receive a higher interest rate than before.

The Term Is Almost Over

It could be tempting to access money in a pinch with a cash-out refi, but if the loan is almost paid off, try to hold out. By waiting a little longer, you can avoid entering a contract with a new lender and paying interest all over.

Quick Note:

Car dealerships make most of their profit off of their auto loan financing. 


Using a calculator is only one important step to take before buying a new vehicle. Spend time researching the vehicle you want so that you have a good sense of the market for the model you want and what is a fair price.

Are you interested in learning more useful information about personal finance? Check out our blog post section for helpful tips and tricks to put to use in your life today!

Jacob is a co-founder and partner of Community Tax, a Chicago-based full service tax company helping customers with tax resolution, tax preparation, bookkeeping and accounting.

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