Before you consider refinancing, you should typically make sure at least two years have passed since you signed the original loan contract. You usually can’t refinance right after buying a car and finalizing the loan, especially if it's a bad credit auto loan.
How Soon Can You Refinance a Car Loan?
The general rule of thumb is to wait at least two years before refinancing a bad credit car loan – this is the best time to refinance an auto loan. The reason why is because lenders like to see a payment history with the car loan to see how you've managed it. Plus, two years gives you plenty of time to improve your credit score, which can help you get a better interest rate.
2 Situations Where Refinancing Makes Sense
Refinancing isn’t the answer for everyone. There are times when it makes sense, and others when it doesn’t. If you’re wondering if refinancing is right for you, there are two situations where refinancing can be the best option:
- Your credit improved – You took out a bad credit auto loan because you couldn’t qualify for a traditional car loan. If you recently checked your credit score, and find it's improved since taking out the original loan, you could see if refinancing with a better interest rate is possible. Even though interest rates are increasing, if the original loan came with a higher than average interest rate, your new interest rate could very well be lower, making the monthly payment and overall cost of the loan more affordable.
- Your financial situation changed – If you got a raise or bonus, great! You can simply pay off the vehicle faster by paying more each month instead of worrying about refinancing, although refinancing with a lower interest rate could allow you to pay it off even more quickly. But, if you had a job change that resulted in a lower income, or you simply can’t afford the monthly payment, you can also refinance to extend the loan term and make the monthly payment more affordable. Be aware that if you do this, it’s going to take longer to pay off the loan, the interest charges are going to increase, and you run the risk of being upside down for a longer period of time.
If you want to refinance, but you’re currently underwater on the loan, you need to take care of the negative equity first. Most lenders aren’t going to refinance a car with an actual cash value that’s less than the loan payoff. You can cover the negative equity in one lump sum if you have the cash. If not, you need to wait until the vehicle’s actual cash value is equal to or more than the loan balance.
The Bottom Line
When you’re ready to refinance, you can typically use the lender you worked with originally, but it’s recommended that you shop around. It takes time before you can refinance a car loan, but it can be worth it if you’re looking to save money.
While we can’t help with refinancing, Auto Credit Express can help you find a dealership that has the right lender for you to work with. We've been helping car buyers with credit issues for nearly two decades by matching them with dealers in their area that work with a wide range of credit situations. Our service is free and comes with no obligations, so you have nothing to lose. Go ahead and fill out our secure auto loan request form to get started today.