Thursday, 24 October 2019

When Should You Refinance Your Car Loan?

The question that we are going to be tackling today is how long do you need to wait before refinancing your vehicle or when is it best to refinance your current car loan. And the reason why I want to talk about that is that just the other day I was talking to some new friends who had mentioned they had actually just bought a car, unfortunately, it was not at the best interest rate that they could get. The person that sold the vehicle said something that frustrates me and makes me really upset, they said don't worry you can refinance your car in 6 months. And the reason why that frustrates me so much is that it is not true. 

  • You do not need to wait any period of time before you can get your car to refinance.

If anyone that is reading this as worked at the dealership, let me know if this is correct. but I am assuming that this whole you need to wait 6 months is because I am guessing that salesmen who sell vehicles get an extra commission if you finance the loan there. They will get a commission if you sell the vehicle, they will get another source of commission if they actually take out the loan through whatever finance company they use, so that is my assumption, they don't want you to refinance any earlier than 6 months because they need to make sure that the loan is funded with that company for 6 months so they can get their commission.

Either way, you do not need to wait 6 months, in fact, you probably shouldn't wait 6 months and what I want to do is illustrate why you probably want to do it way before the six-month mark and to do that I have decided to just illustrate this through a hypothetical loan situation so you can see why you should refinance your vehicle more than likely as soon as you possibly can.

We've got someone that purchased a $20,000 vehicle, they finance it for 72-months and their interest rate is 11%. Here's a graphic of that, I decided to use an interest calculator online so you can follow along with me.

  • $20,000 loan
  • 72-month
  • 11% interest rate

Here's what I want to do, I am going to break this down month to month, year to year so you can see what the interest looks like.

In the very first year that they are making payments on this loan, their interest is the highest it will ever be. Keep in mind that your interest that you pay each month is going to be dependent on the loan amount of the vehicle. You will notice that the very first payment requires a $183.33 in interest, the rest goes towards a principal balance of the loan. Next month the interest goes down a little bit, he only has to pay a $181.52, and so on.  Every single month the interest goes down, down, down. You can look at any single year, this is the same exact story, the interest goes down every single month all the way until the very end of the loan.

  • This Should Show You Two Things.
  1. Interest Is Determined By Both Rate And Loan Amount.
  2. The Majority Of Your Interest Is Paid At The Beginning Of a Loan.

Now that you understand that the majority of the interest that you pay is at the beginning of the loan, it logically makes sense that you want to refinance when your loan is the highest. Let's pretend that this person got the loan to refinance in 1 month, which by the way it's absolutely possible. Let's say they refinance it at month number one and they got 4% interest.

$20,000 loan
4% interest rate

In this case, when they finance for the same dollar amount, but 4% which is 7% less than the original loan term.

What that equates to is, you will notice that their monthly payment is a lot smaller, it's just $66.67 a month and in additions to that, look at the very first payment they make. The very first payment on the 11% loan required a $183.33. Not only is their monthly payment it's almost $70 lower, but the amount of interest that they've saved each month right off the bat, it's about $120. Some of this may not be new information to some of you, but for those that are new to this stuff, you really need to understand this, because it has a huge impact on the amount of interest that you are in the long run.

What Happen If You Wait Too Long To Refinance Your Car?

If you wait too long to refinance your car, it's not to say that you won't save money, that is not true, you will still save money, but you will not save as much money, it is imperative that if you have the ability to refinance your car in the beginning, you should take advantage of that.

The Biggest Impact You Can Have Is That It Work In Any Loan

I am using a car loan for example but the same works for a credit card, personal loan, mortgages, any loan. You want to refinance at the very top end of the dollar amount of the loan. Normally the very beginning. 


Getting back to car loan specifically, any dealerships or salesperson that says you need to wait X amount of months before you are allowed to refinance is not telling you the truth and in fact, is giving you false information that is harming you. So you should take advantage of everything that you can. 

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