How long should I wait before refinancing my car?
December 15, 2013 4:40 PM   Subscribe

How long should I wait before refinancing my car?

I bought a used car 2.5 years ago and financed it at 13% through a dealer. I've been working on my credit, so six months ago, I was able to refinance it through a second bank at 8.5%. I've finally been able to get a good rate through my normal bank, 5.5%, and I'm wondering how long I should wait before refinancing once again. Will my credit take a hit from the six month wait, or will it improve (or stay neutral) because I get a better loan with a lower payment?

posted by Evilspork to Work & Money (4 answers total)
Response by poster: Excuse me, the new loan would be 5.25%, and 4.75% if I go for a shorter term.
posted by Evilspork at 4:45 PM on December 15, 2013

Best answer: The main thing you'd be worried about here is an increased number of credit checks. That can make it look like you're always on the lookout to borrow money, and it does have a negative effect on your credit score.

But look: your credit score is pretty much only significant when you're trying to borrow money*. If you can refinance and save money, hey, go for it. Indeed, if your credit score weren't good enough, you wouldn't qualify for the refinance.

Two things to be sure of though. First, check closing costs. Those can easily eat up any money you'd save in interest. Second, check the term of the loan. Say you took out a 5 year loan at 13% the first time around. Then two years into it you refinanced to 8.5%. Sounds like a great deal, right? Well, if the term of the 8.5% refinance is another 5 years, you haven't saved nearly as much money as you thought. You'd have to do that analysis again for the refi down to 5.25/4.75% or whatever it is. Indeed, if you're refinancing a short-term, high-interest loan with a long-term, low-interest one, you can actually wind up losing money in the long run.

In short, if you can get a better deal--a truly better deal, ascertained by checking your amortization tables--go for it. Having your credit checked will put a ding on your credit score, but that's what it's there for in the first place.

*There are a very few exceptions, which can include things like car insurance and passing security clearance background checks, but those are outliers. Your credit score is not one of your vital statistics and has no inherent value.
posted by valkyryn at 4:48 PM on December 15, 2013 [5 favorites]

Best answer: 13% used car financing not infrequently includes pre-payment penalties, which would partially or completely negate any value you'd get from refinancing at the lower rate. You should be able to get a payoff quote from your current car note provider which will let you know what penalty, if any, you may be exposed to.
posted by MattD at 5:59 AM on December 16, 2013 [1 favorite]

Response by poster: Luckily there were no penalties for any of these loans.
posted by Evilspork at 8:45 AM on December 16, 2013

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