When to Refinance a Car: Should You Wait?

Why Should I Refinance in 2025?

Picking the right time to refinance your car can be tough, especially when interest rates are rising. If you're not satisfied with your interest rate, refinancing is an excellent way to change to a lower rate, if you qualify. There has been a lot of uncertainty surrounding interest rates of late, given the recent tariffs and overall political climate. That being said, the current trends indicate that interest rates are not likely to drop very much anytime soon. That means you will likely need to rely on improvements to your credit to secure a lower interest rate when refinancing your car.

Besides lowering your interest rate, another time when refinancing is a good option is when you need to lower your monthly payment. Qualifying for a lower interest rate will help, but you can also refinance to a longer loan term, which helps you save money each month.

Be aware, however, that if you extend your loan term without lowering your interest rate, you pay more for your vehicle in the long run. You also run a greater risk of going upside down on your auto loan.

Pros and Cons of Refinancing

The chief benefit of refinancing your auto loan is the potential for lowering your monthly payment. A lower interest rate or an extended loan term will bring your monthly payment down, which frees up more cash every month. You can use that money for other expenses, investments, or to have on hand in case of emergencies.

On the flip side, you can also refinance into a shorter contract, which can help you get out of debt sooner and reduce the amount you pay in interest. Be aware, though, that if there are no prepayment penalties in your loan contract, you can just pay off your loan with larger monthly payments and don't have to go through the refinancing process.

Additionally, applying for a refinanced loan can cause a dip in your credit score. You also open yourself up to a host of potential fees when refinancing, ranging from origination fees to prepayment penalties.

It's worth noting that you'll have to keep in mind that it will be hard to get approved for refinancing if you're upside down on your loan, meaning that you owe more than what the car is worth. Some lenders won't even let you refinance if you're upside down.

How Soon Can You Refinance Your Car?

Typically, one to two years should pass before you consider refinancing. If you can't wait, refi is typically only an option right away if you have excellent credit. Anything less and you'll likely have to wait to qualify.

Credit score plays a big role in refinancing, too. If you don't have good credit, it should be at least as good as it was when you took out the loan. Equity also plays a large role in whether or not you can refinance. Your car has to be worth at least as much as you owe on your loan, preferably, more.

Refinancing lenders have guidelines that your vehicle and loan must fit into in order to refinance your loan. This typically means no more than 100,000 miles or 10 years old, though this adage is being pushed as vehicles are made to last longer.

Times You Should Wait to Refinance

There are times when refinancing isn't the right choice. In these cases, you may not qualify for refinancing, and trying to refinance could only put more strain on your credit if it's struggling. If you are in any of the following situations, you're better off using your vehicle as a trade-in or selling it yourself in a private sale.

• Your car doesn't meet lender requirements – If your car is more than 10 years old, it may be more difficult to find a refinancing lender willing to take that risk; the same goes for vehicles with over 100,000 miles. The more miles on the car, the harder it is to refinance.
• You owe too much or too little – If you just took out your loan, or if your loan is about to be paid off, a lender may not consider you for refinancing.
• You have negative equity – Find out if you have equity before you apply, get a 10-day payoff quote from your lender, and compare that to an estimated value of your vehicle. You can get an estimate of your vehicle's value from a number of websites by answering a few questions.
• Your vehicle is paid off – Unlike houses, cars can't be refinanced once they're paid off. To get money out of your vehicle once you own it, you'll have to sell it or use it as a trade-in toward the down payment of your next car instead.
• Your contract includes pre-payment penalties – If your auto loan included pre-payment penalties, it may not be worth refinancing your vehicle. Sometimes, the penalty offsets any savings you might have gained.

Will Refinancing Help Me Save Money?

The short answer is that it depends on your situation. Refinancing could be a great way to save money on your auto loan, but it also has the potential to tack on unnecessary interest. Thankfully, there is a way to calculate if refinancing your auto loan will end up saving you money. You'll need to consider the remaining loan balance, current interest rate, months remaining on the loan, and the new interest rate and term.

Example: How Refinancing an Auto Loan Can Reduce Costs

Here's an example of a loan that makes sense to refinance based on the above terms. Let's say you took out a $25,000 auto loan at an 8.5% interest rate over a term of 60 months. The total interest paid adds up to $5,771, making the total cost of the loan $30,771, and the monthly payment $513. Assuming you kept up with your payments for 12 months, you would be left with a remaining balance of $20,750 for the remaining 48 months.

If you were able to refinance at a lower rate, say, 5%, and keep the remaining term length the same at 48 months, you would be able to save money. At the lower interest rate, your monthly payment would dip to about $477 per month. By cutting your monthly payment by $36 and not tacking on any additional monthly payments, you would save $1,758 over the course of the loan. You may run into a one-time fee from your lender when refinancing, but it would almost certainly be outweighed by the savings in this instance.

Conclusion

Refinancing your auto loan can be a great way to save, but it's highly situationally dependent. You'll need to be getting a lower interest rate to even consider refinancing your auto loan. Even if you can refinance at a more favorable interest rate, you still consider the remaining loan balance and the loan term length of the loan before and after potentially refinancing.

It's also worth considering what your goal is when refinancing. If your credit has improved since you took out your auto loan, and you're able to get a more favorable interest rate than when you first took it out, refinancing could be a great option. If you're looking to decrease your monthly payment by lengthening the loan term, however, we would only recommend doing so if you really need to free up some cash flow. This strategy will often increase the amount of total interest you end up responsible for, so we would only do so as a last resort.