How to refinance your car loan
Not everyone qualifies for competitive rates when they first take out a car loan. Refinancing your car loan can lower your interest rate. It involves replacing your current loan with a new one with a different length, interest rate or both.
A lower rate can help lower your monthly payments and the costs you’ll pay over the life of the loan. But to make the most of refinancing, you will need good credit and a track record of on-time payments.
7 steps to refinance your auto loan
Refinancing a car loan is similar to applying for any other car loan, with a couple of extra steps. Review your current finances and loan documents, then find the right lender to meet your needs.
1. Decide if refinancing is the right financial move
There are two main reasons to refinance: if you can get a better rate or if you are struggling to make payments.
The first scenario is common if you took out your auto loan when interest rates were high or your credit score was low. If your credit score has improved since you got your loan, lenders will likely offer you better terms, which will help you save money over the life of the loan.
On the other hand, if you feel like you are stretching your monthly budget with your current payment, you can refinance your car loan to a longer term. Extending your repayment term decreases your monthly payment — but you will likely pay more in interest over time.
If refinancing your vehicle will save you money, it’s likely the right choice for you. If you can’t get a lower interest rate through refinancing, it is not a great idea. Refinancing to a higher interest rate will make your loan more expensive, even if your monthly payments shrink.
2. Review your current loan
Most lenders have a minimum loan amount for refinances. So, you will need to know your payoff amount to determine if you qualify.
It is also important to understand exactly how much interest you have been paying, what your monthly payment is and what the total cost of the loan will be if you finish the entire term. Gather that information to compare your current loan with the offers you’ll receive in future steps.
Education is power when it comes to getting the best deal. Use an auto loan calculator to understand how much you are paying on your existing loan and compare it to your refinance options once you apply for preapproval.
3. Check your credit score
Your credit score and history are major factors lenders consider when you apply for refinancing. If you have made smart money decisions since then — paying down your credit card debt and making on-time payments, for example — your credit score may have improved. Lenders will view you as less of a risk and may offer you better rates.
Check your credit score before you start applying. This will help guide you toward lenders you qualify for and predict potential rates. Even those who have bad credit may still be able to get a loan with a lower rate by finding the right lender.
The better your credit score, the lower the interest rate you will likely receive from a lender. Your payment history matters, too.
4. Estimate your car’s value
The cost of your loan isn’t the only factor to consider when deciding whether to refinance. You will also want to know what your car is worth. Resources like Kelley Blue Book and Edmunds make estimating your car’s value easy.
If your car is newer with low mileage and a sizable balance that will still take years to pay off, refinancing could save you money and prevent you from going upside-down on your loan. If it’s worth less than what you owe, you may be out of luck.
And if your vehicle is almost paid off, it makes less sense to refinance since interest currently makes up a small portion of your remaining payments.
Knowing the value of your car can help you determine whether lenders will be willing to refinance. If your vehicle isn’t worth much, refinancing could cost you more money than you’d save.
5. Shop around for the best refinancing rates
All lenders weigh your credit score, financial history and eligibility differently. If you decide to refinance, start with the bank or credit union you use for other services. Some financial institutions offer discounted interest rates to existing customers. Then compare the rate offered by your current bank with rates from other lenders to get a clear view of what top lenders offer.
When you are ready, get preapproved with at least three lenders. With multiple preapproval offers, you can see which option is the best for your financial goals.
Interest rates vary widely, so compare a few lenders before deciding. Shop around — but check with your current financial institution since there may be discounts for current customers.
6. Determine your savings
After shopping around for rates, do the math to see how much you would save by refinancing your car loan. Use an auto loan refinance calculator to make the comparison easy.
Check your current loan for fees. It is not uncommon for lenders to charge a prepayment penalty, which will make it more expensive to refinance.
You should also be clear on your goals. If you want to lower your monthly payment, make sure the new loan won’t cost too much more if you opt for a longer repayment term. If you are refinancing at a lower rate, make sure you save enough in interest to offset any fees.
A shorter loan term is also worth considering if you have extra room in your budget. You’ll reach the finish line faster and may save money in interest, depending on the terms you receive on the new loan.
Doing the math ahead of time will let you see how much money a new rate could save you in terms of interest, monthly payments or both.
7. Get your paperwork in order
Preapproval is important, but it’s not the end of the process. When you apply, plan to provide the lender with these documents:
Proof of income, including W-2s or most recent pay stubs
Proof of residency: recent utility bill, lease agreement, monthly mortgage statement or tax bill
Proof of insurance: recent monthly statement or insurance cards
Details about your existing loan (such as balance, interest rate, loan term and monthly payment)
Details about your vehicle: year, make, model, mileage and vehicle identification number (VIN)
Be sure to go over your application and documents to double-check for errors before submitting.
Once you submit the paperwork and 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.
The bottom line: Organize your documents ahead of time to speed up the refinancing timeline. Be prepared to spend time contacting both lenders to ensure your pay-off and payments go to the right place.
Factors to consider before refinancing
Before jumping into the refinancing process, make sure it makes sense for you.
Requirements for refinancing: Every bank or lender has its own criteria to determine if you are eligible for refinancing. Be sure you are not upside-down on your loan and are current on payments. The amount of time left on your loan is another eligibility requirement. Lenders will often want to see at least six months of payments on your loan, and you should have at least six months remaining, too.
Prepayment penalties: Many auto loans include clauses specifying how and when you can pay off the loan. Often these clauses 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 debt-to-income ratio is one of the many factors considered by lenders. The more debt you can pay off before applying for a new loan, the greater the likelihood of receiving competitive loan terms. You can use an online calculator to help compute your debt-to-income ratio.
The bottom line
Refinancing your car loan can significantly impact your personal finances. But before you apply with a lender, investigate auto loan rates and compare those terms with the terms of your current loan.
By shopping around and working on 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.