When to Refinance a Car and When to Wait

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According to Statistics Canada, 1.6 million new vehicles were registered by Canadians in 2021. So if you’ve taken out an auto loan in recent times, you’re in good company.

However, when the new car smell wears off and those late-night drives become a ho-hum experience, there’s one aspect of car ownership that you can’t escape from:

The loan.

When you’re looking at your bills and the car loan keeps taking a chunk out of your bank account, refinancing is an option worth exploring. But of course, figuring out when to refinance a car loan can be tricky.

Luckily, we’ve put together a handy guide that’ll help you figure out if and when you should look to refinance your car loan. Keep reading to find out more.

Here’s When You Should Refinance Your Car Loan

Let’s say that you’re sold on refinancing your car loan. You want the clean slate, the second chance, and the mega-savings. The only question left to answer is, “When is the best time to refinance a car?”.

In our experience, there are three situations where refinancing a car could be a good idea:

1. You Want a New Lender

Think about the last time you signed up with a service provider on the cusp of major growth.

The deals? Awesome.

The company’s way of doing business? Even better.

Until one day you wake up and learn that the company has been acquired. And as the paperwork changes and people get replaced by auto responders, the quality of your service begins to decline.

This is okay when you’re talking about a streaming service or a coffee subscription. With your car loan, however, not so much.

Are you tired of dealing with subpar customer service? Is your lender slow to return calls or update your payment information?

Refinancing can free you up to find a lender who suits you better.

2. Your Credit Score Has Improved

There’s an open secret in the financial industry:

People with better credit scores often receive better terms on their loans.

And from a business standpoint, this makes sense.

If your livelihood depends on your ability to separate the payers from the non-payers, you’d likely be looking at people’s financial histories to inform your decisions. A family member may feel comfortable with lending you money because they know you’ll pay them back. But your auto loan provider likely doesn’t know you on a personal level at all.

A strong credit score makes it easier for them to give you the green light.

That being said, not everyone has the luxury of buying a car with flawless credit. If it’s been a while since you bought your car and your credit has since improved, it may be a good idea to refinance — the reduced interest alone could save you a lot of money.

3. You’re Changing the Terms

Sometimes parents have to sign off on loans for their kids. Or if your credit score was shaky at the time that you applied for your loan, you may have needed a co-signer.

Fast forward a few months or a couple of years, however, and now you’re settled into your job and you’re financially stable enough to handle the loan on your own. Or maybe the kids have graduated from high school and are already making all the payments.

Refinancing your car loan can make it easy for you to remove co-signers or add payees as needed.

When Should You Hold Off on Refinancing a Car Loan?

Okay. So we’ve talked about when to refinance a car loan. But are there situations where refinancing should be off the table?

Here are some common scenarios where you may be better off just paying the loan:

1. Your Car Is Old

Not everyone is in a position to drive the latest Porsche. And that’s okay. However, if your beater is on its last legs, you might want to think twice before refinancing it.

Here’s why:

If you’re in month 24 of your first loan and you know that it’ll take about 36 months to pay off the second loan, you want a car that has at least four years left in it. Otherwise, you could find yourself making monthly payments on a car that’s already been sold for scrap metal.

Unless you’re driving an antique, those car loan payments would probably be better spent on a new set of wheels.

2. You’re Underwater

Imagine you’re buying a car. On Lot 1, you have a brand-new, never-used vehicle. And on Lot 2, you’ve got a used car with over 100,000 miles on it.

All things being equal, would you pay more for the first car or the second one?

As cars are driven and put into use, they gradually depreciate in value. If you’ve still got $10,000 outstanding on your loan but your car is worth only $8,000, you could be underwater.

No, not underwater like a submarine. Underwater with respect to your loan. When it comes to auto loans, the word “underwater” is used to describe a situation where you owe more than your car is worth.

In this situation, you might want to hold off on refinancing.

3. There Are Prepayment Penalties

Because lenders rely on interest payments to make money, they may not always be willing to let people pay off their loans early. In an effort to protect their own profit margins, many auto loans will come with prepayment penalties.

Depending on the dollar amounts involved, the prepayment penalty may be a blip on the radar. But if the penalty turns out to be quite hefty, however, the costs could offset any savings that you get from your new loan.

For this reason, you’ll need to pay special attention to the terms of your current loan before you consider refinancing.

When to Refinance a Car

Figuring out when to refinance a car doesn’t have to be complicated. There are a few rules of thumb you can follow.

If you don’t like your lender, your credit score has improved, or you’re hoping to remove a co-signer, refinancing could be the solution you need. But if your contract has prepayment penalties or your car is old, you’ll want to wait before refinancing.

Are you ready to refinance your car now? We offer low interest rates and affordable payments. Get your car financing approved today!

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