When Is It Not Worth Refinancing My Car Loan?
Refinancing a car loan can be an effective way to lower your monthly payments and infuse some much-needed cash into your budget. If you’ve been struggling with high monthly car loan payments that make it hard to pay your other bills, car loan refinance may be the right option for you. But in order to unlock the greatest savings benefits, you’ll need to refinance your car loan at the right time.
While you can generally experience significant savings benefits by refinancing early in the loan term, waiting too long can potentially create a situation where it no longer makes financial sense. In general, you should have at least two years remaining on your loan to ensure you experience a significant financial savings from auto refinance.
There are several reasons why two years is often the tipping point for when it no longer remains beneficial to refinance a car loan:
- Interest payments are front loaded in the first few years of your loan
- You run the risk of being upside down on your car loan late in the loan term
- Some lenders have requirements that may restrict your ability to refinance late in the loan term
Interest Payments Are Front Loaded
Car loans are structured in a way that front loads the interest. In the first few years of your loan term, the majority of each payment will be applied to the interest, while only a small portion is applied to paying off the principal. As you move through the loan term, this flips and a larger portion of your payment will go towards the principal. Once you reach the final year of your loan, almost all of your monthly payment will go towards the principal.
For most people, the primary goal in refinancing a car loan is to save money. This occurs when you lower the amount of interest you’re paying on the loan. Because most of the interest is paid in the early portion of your loan, you will typically experience the greatest savings benefits by refinancing within the first year or two of the loan. If you wait until the final two years of your loan, there is less potential to save money on a lower interest rate.
In some situations, you may even end up paying more money in interest if you refinance extremely late in your loan term. This is most common during the final year of your existing loan when you’re almost exclusively paying principal. Refinancing at this point will most likely add more interest onto the life of your new loan than you have left to pay on the existing loan. If this occurs, you will most likely spend more money over the life of the loan by refinancing.
You Run the Risk of Being Upside Down on Your Car Loan
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Cars typically depreciate in value significantly over time. Depending on the terms of your existing loan, you may find that you owe more money on the loan than the car is worth if you wait to refinance until the last two years of the loan term. This is called having negative equity in your vehicle, or being upside down on your car loan.
It can be very difficult to refinance a car when you’re upside down on your loan:
- Often, this will result in less favorable interest rates, making it hard to unlock significant savings
- You may also have to make a down payment when you refinance to get the amount of the loan to be less than the value of the vehicle
- Some lenders may not even consider offering auto refinance when you have negative equity in the vehicle
By refinancing your car earlier in the loan term, you reduce the risk of having negative equity in the vehicle. This will generally help you unlock more favorable interest rates so that you can experience the greatest savings benefits from your efforts.
Lender Requirements May Make it Harder to Refinance Late in Your Loan Term
Many lenders have refinancing requirements that make it more difficult to refinance your car late in the loan term. While these requirements vary from lender to lender, they often involve specifics regarding the:
- Number of months remaining on your existing loan
- Remaining balance on your existing loan
- Age of the vehicle
- Mileage on the vehicle
In general, the older the vehicle and the more miles on it, the harder it may be to refinance. In addition, you may find it more challenging to unlock favorable interest rates with an older vehicle. Similarly, lenders may feel it’s simply not worth refinancing your car loan if there isn’t a large enough balance remaining or if there are too few months left on your existing loan.
While these requirements don’t prevent you from refinancing or from saving money if you choose to refinance, it may limit your options a bit. Make sure you look into the specific requirements of each lender if you plan to refinance late in your loan term.
When Is it a Good Idea to Refinance My Car with Less than Two Years Left on the Loan?
Auto Refinancing with iLending Car Loan Refinancing
There is one primary exception to the guidelines we’ve discussed above. If you’re really struggling financially and need a lower payment to pay your bills each month, then refinancing your car within the last two years of the loan may be worthwhile. You can often lower your monthly payments by refinancing for a longer loan term than is remaining on your existing loan. You may also be able to skip a payment or two when you refinance, providing the opportunity to get on more solid financial footing or pay down other high interest debts for several months.
Just keep in mind that if you refinance for a longer term than is remaining on your existing loan, you may end up paying more in interest by refinancing. However, if a lower payment is necessary to improve your financial situation, it may be worthwhile to pay more over the life of the loan in exchange for the additional breathing room you’ll experience in your monthly budget.
iLending Makes Car Loan Refinance Easy and Hassle Free
If you’re considering refinancing your car loan, iLending can help. Our exclusive You First Approach™ makes the process easy and hassle free.
Our You First Approach™ pairs you with a loan consultant who will listen carefully to you to learn about your refinancing goals. Your loan consultant will then leverage our vast network of over 50 nationwide lenders to shop around for the best loan options that meet your goals. After reviewing the best options with you and answering your questions, your loan consultant will recommend the ideal loan for your specific needs.
This process increases the likelihood that you’ll be able to receive the best possible interest rates even when you refinance late in your loan term. If you’re looking to refinance and there are under two years left on your existing loan, our You First Approach™ is the ideal solution to deliver your desired outcome.
In addition, our team will handle the entire process for you, including filling out all paperwork and following up with your existing lender to ensure this loan is paid off properly. You’ll have peace of mind that everything is being handled correctly every step of the way.
On average, iLending customers save $143 per month when they refinance their car loan with us. This monthly savings can help you manage your budget more effectively and make it easier to pay your bills.
Apply now to get the car loan refinance process started.
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