When Is it Not a Good Idea to Refinance Your Auto Loan?

You have most likely heard of refinancing a home loan, but are you familiar with refinancing an auto loan? If not, it’s essentially the same process – you’re taking out another loan with a longer-term or lower interest rate to pay off the existing loan and lower your payments. In essence, refinancing your auto loan is a good way to free up some cash every month and save money on interest. However, there are certain circumstances when it’s not a good idea to refinance your car loan.

When should you not refinance your auto loan?

 "Zero-Percent Financing For 60 Months" signage is displayed on a window at the Dodge World automobile dealership.
“Zero-Percent Financing For 60 Months” signage is displayed on a window at the Dodge World automobile dealership. | Tim Boyle/Getty Images

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While there are many good reasons to refinance your auto loan, there are times when it’s not such a good idea. According to Autotrader, if your current loan has a pre-payment penalty attached to it, then you may not want to refinance it as you will be charged that fee. Also, you may want to refrain from refinancing your auto loan for a longer-term if your current loan is short.

For example, if your current loan term is set for 36 months, then refinancing it for 48 or 60 months is not a great idea. Of course, doing so can be tempting because it would equate to lower monthly payments, but you could end up paying more in the long run due to the extended loan term. Here are some other instances where refinancing your auto loan wouldn’t make sense:

  • You have already paid off most of the loan: Credit Karma notes that “interest is often front-loaded,” which means that if you have already paid off a lot of the loan, then you have already paid a lot of the interest. In that case refinancing later in the loan term wouldn’t help much.
  • If your car is old or has high mileage: If your car is older or has a lot of miles on the odometer, some lenders won’t refinance it. For example, some banks stipulate that the car must not be older than 7 years and less than 125,000 miles.
  • If you’re plan to apply for more credit in the near future: Since refinancing your auto loan can impact your credit score, it’s not a good idea to apply for it if you’re planning to buy a house or another car in the near future.

How soon can you refinance your auto loan?

 Key chains bearing the Mercedes-Benz logo at a Mercedes-Benz car dealership.
Key chains bearing the Mercedes-Benz logo at a Mercedes-Benz car dealership. | Dmitry Rogulin\TASS via Getty Images

There is no set timeframe that you should wait before refinancing an auto loan. However, since your credit score will dip after taking out the first auto loan, it’s a good idea to wait at least a few months before refinancing. Additionally, you may need to wait until the original lender is listed as the lienholder on the title in order to refinance.

Remember to shop around for the best rate

Auto dealership sales incentives on new and old resale vehicles
Auto dealership sales incentives | Tim Boyle/Getty Images

If you do plan on refinancing your current auto loan, then remember to shop around for the best rate possible. After all, one of the main points of refinancing an auto loan is to lower the interest rate and lower the monthly payment in order to save money now and in the long term. Not doing so makes refinancing obsolete.

If anything, just make sure that you’re not planning to refinance during the circumstances listed above. By doing so, you may end up paying more money than you originally owed.

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