How To Refinance A Car Loan In 6 Steps

Not all drivers qualify for competitive auto loan rates when they first take out a car loan. If that was the case for you, refinancing your auto loan may help lower your interest rate — or at least make your monthly payment a little lower.

Refinancing involves replacing your current loan with a new one of a different length, interest rate or both. To get the best rates, start by comparing lenders and picking the right time to refinance.

What is auto loan refinancing?

When you refinance your auto loan, you take out a new car loan to pay off your existing one, ideally with better terms. If your credit has improved or you’re in a stronger financial position, you may qualify for a lower interest rate, reduced monthly payment or a shorter loan term. Lenders will review factors like your credit history, current loan and vehicle’s value to determine if you qualify for refinancing. 

Refinancing can be a way to improve your financial situation if your original loan came with less favorable terms, which often happens due to a lower credit score or small down payment.

When should you refinance your auto loan?

There are two main reasons to refinance. Either you can get a better interest rate or a more affordable monthly payment, and both are possible if you can qualify for a better offer.

“Refinancing can be the right move if it improves your financial position, and that could be different for everyone,” says Reid Rubenstein, co-founder and managing partner at RefiJet. “The key is comparing the total cost of your current loan against your potential new one. If the math works in your favor, refinancing is worth pursuing.”

• Scenario 1: You can get a better rate
  

  Car loan refinance rates may be better than your current rate if:

  • You took out your auto loan when car loan interest rates were high and they have since dropped.
  • Your credit score has improved — or your debt-to-income ratio (DTI) has decreased — since you took out your loan.
  • Your car has positive equity, meaning you owe less than the car is worth.

• Scenario 2: You need a lower monthly payment
  

  You can refinance in order to swap to a longer term, which may help lower your monthly payment. However, if you don’t also lower your interest rate, you will pay more interest over time. Compare the pros and cons of refinancing before making a final decision.

How to refinance a car loan

Following a few key steps can help set you up for success when refinancing your auto loan. Get your paperwork together ahead of time — like your current loan details, vehicle information and credit profile — to simplify the process and make it less stressful. Being prepared not only speeds up your application but also makes it easier to compare offers and secure better terms.

1. Determine vehicle eligibility

The first step in refinancing a car loan is determining if your vehicle qualifies. Many lenders will only refinance passenger vehicles under 10 years old with less than 100,000 miles. There may be other exclusions as well, such as discontinued models, salvage or flood-damaged titles and heavily modified vehicles

2. Check your credit score

You’re more likely to qualify for a lower interest rate if you have good credit, so check your score before applying to understand what offers you may receive. If your credit has improved since your original loan, lenders may view you as less risky and offer better terms. While refinancing with bad credit is possible, it can be harder to secure a lower rate.

3. Review your current loan

The next step is to confirm that refinancing your loan will save you money. To do that, you need to understand the details of your current loan.

• Payoff amount: Most lenders require a minimum loan amount between $3,000 and $7,500 to refinance your current loan. You can confirm your payoff amount online or by contacting your current lender. If your loan-to-value (LTV) ratio is high — meaning you owe as much or more than the car is worth — then that can also push your APR higher.
• Remaining term: You can still refinance if you have less time left on your loan, but refinancing may not save you any more money than just paying off your current loan. The term you choose is important because a longer term could increase the total amount of interest you pay.You will likely need to pick a loan term of 24 or 36 months. 
• Interest and fees: You’ll save the most money through refinancing if you can qualify for a lower interest rate than you currently have. In addition to interest charges, some lenders may charge titling or lien-holder change fees that could increase the cost of your loan. Take time to find lenders with few or no fees to maximize your savings.

4. Estimate your car’s value

Refinancing could save you money if your car is newer and has low mileage — and your loan has a sizable balance. But you may be out of luck if your vehicle is worth less than what you owe. A lender may be much less willing to refinance if you’re already underwater or upside down on your current loan. Resources like Kelley Blue Book and Edmunds make estimating your car’s value relatively simple.

5. Get your paperwork in order

When you apply for preapproval, plan to provide the lender with a few common documents:

• Proof of income, including W-2s, recent pay stubs, bank statements or tax returns.
• Proof of residency, such as a recent utility bill, lease agreement, monthly mortgage statement or tax bill.
• Proof of insurance, like recent monthly statements or insurance cards.
• Details about your existing loan, such as the balance, interest rate, loan term and monthly payment.
• Details about your vehicle, including the year, make, model, mileage and vehicle identification number (VIN).
• Loan payoff amount, which you can request from your current lender either online, by phone or at a branch, depending on its contact options.

Be sure to check your application and documents for errors before submitting them. Once you get full approval, follow up with both lenders. If you receive a check, ensure that your previous lender receives it and applies it to your loan. If your new lender is paying off the old one, follow up frequently to avoid missing payments due to clerical errors.

6. Compare lenders

No matter your credit score, it is smart to compare online lenders, banks and credit unions. All lenders weigh your credit score, financial history and eligibility differently. Online lenders, for example, tend to use factors like employment or income when determining your rates.

Compare the rate offered by your current lender with rates from other lenders to get an idea of what you might qualify for. When you are ready, get preapproved with at least three lenders. With multiple offers, you can see which option is the best for your financial goals.

If you want to lower your monthly payment with a longer repayment term, make sure you understand how that will impact your interest costs. If you have extra room in your budget, consider a shorter loan term. Depending on the terms, you’ll pay the loan off faster and may save money on interest. Also, check your current loan for fees. Some lenders charge a prepayment penalty, making refinancing more expensive.

Additional factors to consider before refinancing

“Refinancing can save you money every month,” says Melinda Zabritski, head of automotive insights at Experian, “but you have to consider the overall impact.”

Before jumping into the refinancing process, make sure it makes sense for your finances and long-term money goals. There may be additional costs, especially if you adjust your loan term. The only way to know if refinancing a car loan makes sense is to contact lenders and calculate the costs and potential savings.

• Prepayment penalties: Many auto loans include clauses specifying how and when you can pay off the loan. These clauses may include a prepayment penalty, a fee assessed if you pay off the loan early. Not all lenders charge this, but it could affect your overall savings.
• Time remaining on the loan: If you are near the end of your current loan, it may make more sense to finish paying it off instead of sinking time and money into refinancing.
• Your financial health: Your DTI is one of the many factors lenders consider. The more debt you can pay off before applying for a new loan, the greater your likelihood of receiving competitive loan terms.
• Your co-borrower or cosigner: If you have poor or bad credit, consider using a co-borrower or cosigner to help you qualify for refinancing. You could receive lower rates while enjoying greater financial security by having another party on your loan.
• Your current lender: If you are unable to make your payments, your lender may offer payment relief programs that can help you modify your loan or defer your payments until you are in a better financial situation.

Bottom line

Refinancing your car loan can significantly impact your personal finances. But before you apply with a lender, check auto loan rates and compare those terms with the terms of your current loan.

By shopping around and improving your credit score if needed, you may be able to reduce the total amount you pay or get a more affordable monthly payment by switching lenders. If refinancing isn’t right for you, consider alternatives, like trading in your car.

Frequently asked questions

• If you refinance your car loan, do payments start over?
  

  Not necessarily. You do get a new auto loan, but if the loan term mirrors what you had on your old loan, the remaining payment period will be the same. That said, opting for an extended term to lower your monthly payments could feel like you’re restarting the loan, and you could pay far more in interest.

• When refinancing a car loan, do you get your money back?
  

  Yes, but only if you opt for a cash-out auto refinance. It involves trading in your current auto loan for a new one for a higher amount. The new lender pays off your old loan and disburses the remaining proceeds to you in cash. Keep in mind that you’ll need equity in your vehicle to qualify. You also risk becoming upside-down or owing more than your vehicle is worth if you decide to move forward with the transaction.

• Can you refinance and add someone else to your loan?
  

  Yes, it is possible to refinance with a co-borrower. The other person will need to qualify as well, and you will share joint ownership of and responsibility for the vehicle. While you may be able to find a lender that accepts cosigners when you refinance, it’s rare, so be prepared to submit a joint application if you want to refinance and add someone else to your auto loan.

• How much does it cost to refinance a car?
  

  It’s possible that you may have to pay fees when you refinance your auto loan, although this is uncommon. Some fees vary by state, so contact your local DMV. Possible fees include:

  • Prepayment penalty.
  • Application or origination fees.
  • Administrative fees.
  • Title transfer fees.
  • Registration fees.

• What disqualifies you from refinancing a car?
  

  You will not qualify for auto loan refinancing if your vehicle is ineligible due to age, mileage, condition or vehicle type. Some lenders may not work with you if your loan is too new, you owe too little on the loan or you are behind on paying the loan.

  Other factors that may disqualify you from refinancing include poor credit history, low income, high DTI ratio or a combination of those factors.

• Can you refinance an auto loan with a 500 credit score?
  

  While it is possible, it is unlikely you would qualify for beneficial refinancing terms. Building your credit score could help you improve your overall financial situation and qualify for a more competitive rate in time.

• Where can you refinance a car loan?
  

  In most cases, you will be able to find refinancing options at banks, credit unions and online lenders. Sometimes, you can refinance with the lender who funded your original loan — but this option is rare.