If you want to modify the term and rate for your current auto loan, you can get a refinance. People get refinances for various reasons, but each of those reasons involves modifying the current financial situation.
Some people get one refinance, and that’s all it takes to pay off their auto loan. These borrowers continue to make the monthly payments until they become debt-free on their cars. However, other borrowers need additional refinances. If you need multiple refinances on the way to paying off your auto loan, this guide is for you. Discover how many times you can refinance your car, the pros and cons, and what to keep in mind before refinancing your auto loan again.
What Does It Mean to Refinance a Car?
Refinancing your car results in a new auto loan. You take out a new auto loan and use the proceeds to pay off your current auto loan. After a refinance, you will have a new rate and term for your loan.
Common Reasons to Refinance a Car
These are some of the main reasons people refinance their cars.
- Get a better rate
- Free up more space in their budgets
- Get out of debt faster
- Tap into extra cash
Potential Benefits of Refinancing Your Car
A car refinance can present several benefits. Some refinances let you capitalize on multiple benefits at the same time, while you can only fulfill one of these objectives with other auto refinances.
- Secure a lower interest rate: If your credit score has improved and rates have dropped, you can end up with a better interest rate.
- Reduce your monthly payments: A lower interest rate will reduce your monthly payments, but that’s not the only way to make an auto loan more affordable. You can also extend the loan’s duration and keep the same loan amount. That way, your monthly payments are spread across more time, which results in more space in your budget.
- Receive extra capital: A cash-out refinance increases your loan’s amount. The difference between your current loan’s amount and the new loan’s amount becomes accessible capital. You can use that money for any purpose.
- Get out of debt sooner: While cash-out refinances are more popular, you can also initiate a cash-in refinance. Putting extra cash into your auto loan as a part of the refinance can get you out of debt sooner.
How Many Times Can You Refinance A Car?
You can refinance a car as many times as you’d like. However, you must wait 60-90 days to refinance after you buy the car. That’s the processing time for transferring the vehicle title to your current lender. Once the title transfers, you can refinance immediately. If you refinance today and find another lender who is willing to initiate a refinance, you should technically refinance the next day if you fulfill the requirements.
Ideal Times to Refinance a Car
It’s optimal to wait at least 6-12 months in between refinances. Getting an auto loan refinance is also a good idea if interest rates have dropped. Lower interest rates ensure you can end up with monthly payments even if you keep the loan amount and term length the same.
Is It Beneficial to Refinance Your Car Loan Multiple Times?
It’s often a bad idea to refinance your car loan multiple times. Each refinance results in additional fees, such as prepayment penalties for your current loan and closing costs for the new loan.
Refinancing multiple times will keep you in debt longer. While you can reduce your monthly payments with a refinance, it’s better to get rid of them entirely. Most auto loans range from 3-7 years. Being more prudent with your spending and looking for extra ways to make income or advance in your career can get you out of debt sooner. Looking for ways to pay off your auto loan faster can also help you with other debt, especially after you’re done with the auto loan.
When to Start the Refinancing Process
You should wait 6-12 months after buying a car to start the refinancing process. It’s also a good idea to wait that amount of time before getting a second refinance. This timeframe gives your credit score enough time to recover from a hard credit check. You’ll also have made several monthly payments and will have a lower balance.
Risks of Refinancing Your Car Multiple Times
These are some of the notable risks to keep in mind before refinancing your auto loan.
Understanding Depreciation
Depreciation makes cars less valuable over time. Their resale value continues to diminish, making a refinance less practical over time, especially if you want to initiate a cash-out refinance.
Potential Negative Equity
Negative equity occurs when the car’s value is less than the loan’s amount. This risk is realistic for any auto loan, but it’s even more likely for a refinance. Your auto lender may require GAP insurance for the loan if you have negative equity or are likely to incur it in the future. It’s possible that your car depreciates at a faster rate than you are able to pay off the loan. That’s not an issue if your car doesn’t get involved in any accidents.
Effects on Credit Score
Each refinance results in a hard credit check that has a negative impact on your credit score. A lower credit score will make it more difficult to get better rates and terms for any loan, not just car loans. Losing additional points on your score can also impact your eligibility for various types of financing.
Factors You Should Consider Before Refinancing Your Car Loan Again
These are some of the details you should keep in mind before refinancing your auto loan in the future.
Evaluating Your Financial Situation
Review your financial situation to see if you can avoid a refinance. Sometimes, it’s necessary to free up extra room in your budget and access additional capital through a refinance. Other car owners can continue to make the monthly payments or pick up a short-term side hustle to get out of debt sooner.
The Impact on Your Credit Score
Your credit score will go down by a few points if you get an auto refinance. You won’t feel the impact too much if you have a credit score above 700 and aren’t applying for loans anytime soon. However, if you have a 625 FICO score and want to also buy a home soon, an auto refinance risks making you ineligible for a mortgage.
Refinancing Costs and Penalties
It costs money to get a new auto loan, and you will also have to pay penalties for your existing loan. Calculate these costs before committing to a refinance to see if they make sense for your finances.
Refinancing With Your Existing Lender Versus a New Lender
You shouldn’t rush to your existing lender for an auto refinance. Shopping around can help you find better rates and terms for a new car loan. While you may end up working with your current lender, comparing options will ensure you aren’t missing out on extra savings.
Conclusion: Determining Whether or Not You Should Refinance Your Car
Refinancing a car can serve many objectives. You can get a better rate, reduce your monthly payments, tap into additional capital, or reduce your loan amount with a cash-in refinance.
While refinancing a car presents several benefits, there are some considerable downsides. You will likely stay in debt longer and pay more interest in the long run. Refinancing results in additional fees, such as penalty fees and closing costs. Each refinance incurs costs from your current loan and your new one.
Refinancing can work out, but it isn’t for everyone. You should assess your financial situation before committing to a refinance.
Frequently Asked Questions About Car Refinancing
Refinancing a car will hurt your credit score. Each refinance results in a hard credit check, which will reduce your score by a few points.
You technically don’t have to wait to refinance your car again as long as you find a willing lender and have a sufficient credit score. However, it’s a good idea to wait and focus on paying off your loan. Refinances will keep you in debt longer, and the penalty fees and closing costs will accumulate.
