How Long After Buying a Car Can You Refinance?

How Long After Buying a Car Can You Refinance?
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If you have a high-interest loan on a car, you may be wondering if you can refinance it. But how soon can you refinance a car loan after purchase?

What is refinancing?

Refinancing, or “refi” for short, is a way to get a better interest rate on an existing loan by revising the terms of your original credit agreement. Hopefully, during a refi process, you will end up with a lower interest rate, which can drop your monthly payment and be a bit easier on your pocketbook.

How soon can you refinance a car loan after purchase?

Technically you can refinance your loan as soon as the current one is active and processed and you find a lender willing to approve the new loan, but that is not always the best practice.

Waiting 60-90 days to allow for all the paperwork to be processed and finalized is a better strategy to avoid issues, and waiting even longer, two years or more, can have benefits. Here are some of the downsides to early refinancing.

Early repayment penalties

Some lenders use early repayment penalties as a way to discourage buyers from paying off the loan too quickly. If the loan is paid for, the lender cannot keep charging interest on the loan. To help ensure they get maximum benefit from lending money, early termination fees can be in the loan details. Read the fine print and ask questions regarding early repayment before signing any loan agreement.

Credit report rebound

When financing a vehicle loan, a dealer or finance company will have to check your credit report to see if you qualify. There are two types of credit reports that can be checked.

One is called a soft credit inquiry. It does not harm your credit score but simply gives the lender an idea of how trustworthy you are in regards to lending you money. These aren’t connected to a specific application for credit, and they typically aren’t visible on your credit report.

A hard credit inquiry is when you give permission to have your credit report completely evaluated. The lender can look at your credit report history and see all the dings and dents (if you have any).

Having a hard credit check drops you a few points on your report, though in 12-24 months it will no longer be an issue, especially if you haven’t had multiple hard pulls in a short period of time.

Depreciation

When buying a vehicle, it is OK to be picky. Picking out the right vehicle is critical if you want to protect that asset.

Luxury cars are often the worst offenders of fastest depreciation. This is not always the case, though. There are cars out there that rank lower on the reliability scale than others. A car company that historically builds and provides vehicles that are not as reliable and trustworthy as other car companies typically has vehicles with faster depreciation values. Over time, the vehicles end up costing more to maintain and repair compared to other brands.

Pros and cons of refinancing your car loan early

Pros of refinancing your car loan early

Not all car loans are good ones. If you are in a bind or the economy is in a hard spot, it may be advantageous to refinance your car and get a better rate if you bought it at a strange time when interest rates were sky high.

You can get out from under a bad loan

Refinancing can get you into a better place financially by reducing the amount of money you spend over time. Remember, lenders make money from you by charging interest on the loan monthly. Getting out of a high-interest-rate loan results in you spending less over the life of the loan.

It can lower your payments

Not just because of improved rates, but by extending the loan you can reduce your monthly payments. Doing a vehicle refi does more than improve your interest rate. It also can lower your monthly payment. Typically when a refi occurs, the life of the loan starts over and your payment terms are extended. Doing a quick calculation of how this will impact your money is something to consider.

You can take advantage of improved credit

If your credit improves because you have a loan out, that is also a good time to consider a refi. Better credit scores often lead to lower interest rates. The less you pay out of pocket means more money you can spend or save for whatever your heart desires.

You can get the best of both a rebate and a low interest rate

When you do a refi, you typically can settle one loan, and the bank could reward you with a cash incentive. One reason a bank would do this is that it gets you into another loan and continues to make money from you. The bank has done the calculations and found them to be favorable enough to incentivize you to take out another loan. Even if the loan is cheaper in your eyes, the bank will make that rebate money back, plus some, as long as you are paying.

It’s the only way to add or remove a cosigner

Doing a refi can help you become financially independent. Many new car buyers who have little or no credit need a cosigner. In this case, a cosigner is a joint signer of the loan who has good credit. If your credit improves and you can get the cosigner off your loan, do it. While the cosigner can’t claim your property, getting them off your loan can help build your credit.

You switched banks/credit unions

Banks and credit unions want you to do business with them. Why? Because they make money on lending you money. In the case of a credit union, you’re also a shareholder, so they have an interest in seeing you happy. If they can incentivize you to bank with them in exchange for a better interest rate and money back in the form of a rebate or incentive, they will make it very appealing to you.

Lenders do this all the time because the more people you have paying you, the more money your lender makes. It is a simple business.

Cons of refinancing early

While there are not many drawbacks to an early refi, you could face some barriers.

Prepayment penalties

Prepayment penalties are usually where lenders try to get you. Remember, if you are not paying them money, they cannot make money off you. Holding you to terms as defined in the loan agreement is a way to ensure they get every last cent.

You’re underwater

Being upside down in a loan means you owe more money than the vehicle is worth. This might happen if your vehicle has depreciated drastically or the market conditions as a whole have changed, perhaps because of a glut of vehicles or a recall. In that case, you’re likely going to have a hard time finding a lender willing to refinance you.

What can happen is a new vehicle is purchased, but after a few years, it breaks down, resulting in a high-cost repair. The owner of the vehicle probably does not have the money for the repair, so they end up trading it in for a newer one. The old loan gets rolled into the new loan, and the payment can stay the same or similar even though the loan balance has increased. This happens all the time, and refinancing an upside-down loan may not be in your best interest.

You still may not qualify for the best rates or rates have risen

Building credit takes time and it may be too early if you’re trying to refinance before 60-90 days. If you can’t get a better rate, there likely isn’t much point to trying to refinance. Alternatively, rates could have risen, so the previous rate you’re locked in for is the better one.

It’s not “early” anymore

Many car loans these days are considered what is called a “front-loaded” loan. This means the interest is paid down over the term or length of the loan. Refinancing a front-loaded loan may not be the best way to save money over time.

How to refinance a car loan early

If you think you have a car loan rate that is too high and you want to get a better one, here are some things to consider.

1. Figure out if refinancing makes sense

First, figure out if a refi is right for you. As stated earlier, if you have a front-loaded loan, you may already have the best deal. Look at current interest rates, your monthly payment, the value of your vehicle and what happens when you extend your repayment terms. While extending the term could lower your monthly payment, it also means you pay more over the life of a loan.

2. Understand your current loan

You need to know what your current loan rate is. A 3% fixed rate is obviously better than 7.5% fixed. But what is your remaining balance? Can you pay that off early with no penalties instead of getting back into a long-term contract, or is the penalty worth paying to get out of the loan?

3. Check lender requirements and eligibility

Check the lender requirements you need and if you are eligible for a refi. You want the best credit score possible, meaning paying down any credit cards or other debts so you look better to lenders when it comes time to apply.

Calling up your bank or credit union and speaking with a loan specialist can be worth your time. They can also help you understand if there are roadblocks that may be inhibiting you from moving forward with a new loan.

4. Shop lenders

Check with other financial institutions. Not every lender is going to treat you the same way. Remember banks are businesses competing for you while credit unions treat you as a shareholder. Different lenders will offer you different terms. The first step is to get prequalified with a few lenders, letting you compare their rates against each other.

5. Evaluate your offers

Compare the offers based on their terms. You should take into account the interest rates and payment period and factors like if there are early payoff penalties or not. While a lower monthly payment is often the goal of a refi, it’s also worth checking the differences in what you’ll pay in total for the life of each loan.

6. Accept an offer and complete your paperwork

Finally, it comes time to choose the offer that works best for you. You’ll have a bit of paperwork to fill out at this stage, so make sure you have everything you need. This includes personal financial information like W-2s, pay stubs and insurance cards as well as your vehicle’s information such as make, model, mileage, VIN and more.

Conclusion

For most people, a car is a necessity. They need one when they need one, and many people do not have the luxury of waiting for ideal market conditions or an improved credit score. Fortunately, refinancing can be a useful way out of an imperfect situation when and if it makes sense to do so. Weigh the pros and cons, do your homework and you may walk away with a much more manageable monthly payment.

Frequently Asked Questions

How much does it cost to refinance a car loan?

Typical costs associated with loans are application fees or early termination fees. There might also be fees for re-titling the car, depending on your location. None of these fees are standard for everyone and will vary according to the lender and the terms of your loan.

Does refinancing a car hurt your credit?

A refi can negatively impact your credit score because applying for a new loan will cause a hard credit inquiry. This is especially true for early refinancing because it’ll also reduce the average age of your open credit accounts. That said, hits to your credit from inquiries don’t last long, and over the long term getting better loan terms may help you beef up your credit score.

Can I refinance a car I just bought?

Yes, there are no restrictions on how soon you can refinance but waiting about 60-90 days and doing your homework on who has the best rate is a better option.

How many times can you refinance a car loan?

There are no legal limits to how many times you can refinance a car loan. However, every time you refinance, you are in a binding contract with the lender, and each one may have its own fees, differences in rates and other terms.


About Bumper

At Bumper, we are on a mission to bring vehicle history reports and ownership up to speed with modern times. A vehicle is one of the most expensive purchases you'll likely make, and you deserve to have access to the same tools and information the pros use to make the right decisions.

Disclaimer: The above is solely intended for informational purposes and in no way constitutes legal advice or specific recommendations.