Can You Refinance a Car Loan Shortly After Purchase? -Forbes | Car Plazas
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You might consider refinancing your car loan if you’ve found a lower interest rate or better repayment terms than what you’re paying now. In most cases, you can always refinance your car loan, but that doesn’t mean you should always do it.
Here you can learn more about when you can refinance a car loan, what the requirements are and if it is the right step for you.
Can I refinance a car loan?
If you took out a car loan, you can probably refinance it. However, keep in mind that there are some instances when you may not be ready to refinance your car loan just yet. Before you decide to refinance, consider the following:
Read the Terms and Conditions
Refinancing an auto loan is like refinancing any other type of loan: you take out a new loan to pay off your existing loan, and then you make payments to your new lender. If your current lender charges prepayment penalties, it means you may face a fee if you pay off your existing car loan before the prepayment terms expire.
You might be able to skip the prepayment penalty if you wait a little longer to refinance – so check your lease terms and do the math. If the penalty amount is more than what you would save on refinancing, it may not be worth it. However, not all lenders have this penalty, so it’s important to look at your loan terms first.
Find out about the requirements of the new lender
When planning to refinance with a new lender, you may first need to meet some minimum requirements.
- Credit-worthiness: When you took out your original loan, your credit score was hit by the tough credit check. If it hasn’t recovered, you may not qualify for a loan from a new lender, or if approved, you may end up with a higher interest rate than your current loan.
- Minimum loan amount: Lenders require a minimum amount that you can borrow. If the amount you refinance is less than this minimum amount, you are not eligible for a car loan.
- Repayment Period: Many lenders have a minimum term of three or five years. If you plan to pay off your loan in the next year or two, it may not make sense to refinance your loan even if you are eligible. You could pay off your loan longer than necessary, which means you have to pay more interest overall. It also means you’re paying back a car that’s losing resale value.
How quickly can I refinance a car loan?
You may be able to refinance your car loan within a few weeks of purchase, but this depends on where you bought your car, your lease terms, and the new lender you are considering for the refinance.
Since the paperwork can take a while to process, you should wait until you’ve made at least your first payment to your new lender. This will help you avoid delinquency, allowing you to keep your loan current and your credit score not being affected by late payments.
When to refinance a car loan
If you’re thinking about refinancing your car loan, it makes sense if:
- You have great credit. The better your credit score, the lower your potential new interest rate and the more likely you are to qualify for the best repayment terms.
- The interest rate is low. For a refinance to make sense, the interest rate should be lower than what you are paying now. This also lowers the costs you have to pay during the life of the loan and in some cases can reduce your monthly car loan payment.
- You meet the admission requirements. Not all lenders have the same requirements, so for a refinance you should first make sure you are eligible. In addition to good credit, you should also make sure that you meet all other qualifications.
When not to refinance a car loan
On the other hand, you may want to avoid refinancing if:
- The new interest rate is higher. If you can’t get an interest rate lower than what you’re currently paying, it’s not worth refinancing.
- You’ll be making other big purchases soon. If you’re planning to buy a home in the next few months, refinancing your car loan will trigger another tough credit check and increase your debt-to-income (DTI) ratio. These things are important to mortgage brokers and insurers when they go through your paperwork to pre-approve you for a home loan. It is therefore best to avoid refinancing if you want to take out another loan.
- Your loan is more than the value of the car. If you can only get a loan for more than the car’s value, refinancing makes no sense.
- You are in arrears with payments. Refinancing makes sense if you are up to date on payments. However, if you are delinquent or insolvent, you may not qualify for refinancing.
Related: What is the average car payment?
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Frequently Asked Questions (FAQs)
Will refinancing hurt my credit score?
Refinancing triggers a harsh credit check that causes your credit score to drop temporarily. However, this usually recovers after a few months of making payments on time.
Should I refinance my car loan?
You should consider refinancing your car if you have good credit, are guaranteed a lower interest rate than you are paying now, or can get better terms. Also, make sure you are eligible for refinance before applying.
However, you may want to skip refinancing if you’re facing a high prepayment penalty with your current lender, your credit rating hasn’t recovered since you took out your last car loan, or you can’t get a better interest rate.
If you plan to take out another loan soon, e.g. For example, a mortgage, it’s probably best to skip refinancing for now. Refinancing your car loan will temporarily lower your score, causing the interest rate you get on a mortgage to be higher than usual.
Can you refinance a bad credit bureau car loan?
There’s a chance you’ll qualify for a bad credit refinance, but that doesn’t mean you’ll get a lower interest rate than what you’re currently paying. Try to improve your credit score before refinancing so you qualify for the lowest interest rate and terms for your needs.