No rules dictate how long you should wait to refinance an auto loan. Naturally, the best course is to get a great loan upfront. However, conditions can change and present you with a better financing solution down the line with little to no additional costs. When the opportunity arises, taking it offers many benefits.
A steep drop in interest rates is a primary catalyst to refinance an auto loan. Often, rates won't fall for at least a few months after you purchase the vehicle. In a volatile market, though, rates can rise or fall quickly. If your original loan is at 5.5 percent and a new loan offers a 3.99 percent rate, you could save hundreds of dollars or more over the repayment term. In fact, the sooner you refinance, the more you save in the long run. A sharp improvement in your credit score can impact your ability to get a better rate. And if you have saved some funds for a down payment on a new loan, your monthly payments would be much lower.
One circumstance that may inhibit refinancing too soon is being underwater on your loan. When you buy a car, it typically depreciates more quickly than you can pay off your loan in the beginning. If you finance the entire value of a $10,000 purchase, your loan exceeds the sticker price once taxes and fees are added. A new lender may not refinance an existing loan when you owe more on the car than it is worth, unless you can cover the difference out of your own pocket. Lenders usually focus on the retail value of the vehicle when assessing a new loan amount.
Consider all costs when refinancing your auto loan. Paying loan costs again just a few months after you acquired your original loan isn't very practical. However, Bankrate points out that refinances with low or no associated costs are common. If your new loan does have fees, compare the upfront invest to the potential savings. NRL Federal Credit Union reports that typical consumers save $50 to $120 on monthly payments with a refinance. In that case, it could take just one or two months to recoup your initial investment.
Some companies require that a refinance be for a certain amount. Offering a low or no cost refinance for a small amount isn't normally a good risk-to-reward situation for a lender. The age and condition of the vehicle also affect loan options in some cases. As with other personal property loans, the lender's only fallback if you don't repay the loan is repossession of the vehicle. If you wait too long to refinance or you attempt to refinance after trashing the car, you may have trouble.
