How To Refinance a Car Loan
- Refinancing for a lower interest rate or shorter term will likely save the most money.
- Cash-out refinancing lets you replace your existing loan with a larger one and pocket the difference in cash.
- Loan fees, taxes and title charges could offset savings from refinancing.
- You can refinance a car even if you’re upside down on the loan, but your options may be limited.
What does it mean to refinance a car loan?
Refinancing replaces your current loan with a new one. The new loan is used to pay off the existing balance, perhaps with a lower interest rate, a lower monthly payment and a shorter or longer loan term.
The goal is to reduce the amount of interest you pay on the loan or make the payments fit your budget. You can put the money you save toward other financial goals, such as saving for a down payment or paying off credit card debt.
A LendingTree study shows that Americans who refinance their auto loans save an average of $1,346 over the life of the loan. Those who shorten their loan term save $6,291 on average.
You may be able to refinance with your current lender, although some lenders won’t refinance their own loans. You can usually apply for a car loan refinance easily online, and many lenders offer quick decisions.
A cash-out refinance works similarly to a standard auto refinance, but the new loan is larger than your current balance. You can take the difference in cash, with the amount determined by how much equity you have in the car.
When refinancing a car loan makes sense — and when it doesn’t
Refinancing your current car loan to take advantage of lower interest rates or shorten the term can save you money — but you should know the pros and cons of doing so.
When it can make sense
Refinancing an auto loan can make sense if:
- Your credit score has improved.
- You qualify for a lower interest rate.
- You need a lower monthly payment.
- You have positive equity and want to take advantage of cash-out refinancing.
Generally, refinancing can make sense if your financial situation has improved or interest rates have dropped since you bought your car.
When it usually doesn’t make sense
Refinancing an auto loan is often a poor choice if:
- You have negative equity or are upside down on the car, meaning you owe more than the car is worth.
- You have an older or high-mileage vehicle.
- Interest rates are rising compared to the current rate.
- You have less than two years to pay off the current loan.
- The cost of refinancing wipes out any savings.
Refinancing an auto loan may not make sense if you won’t save money or qualify for financing. Keep in mind that the lender may charge fees for refinancing, and you might have to pay title fees and taxes, depending on the state where you live.
How to qualify for a car loan refinance
As with the original loan, you will need to file an application and qualify with the lender to refinance your car.
The lender will consider your credit score, income, debt-to-income (DTI) ratio and other factors to determine your auto loan refinance offer. Borrowers with good credit (670-739) typically qualify for refinancing. However, the best rates and the most savings go to borrowers with very good or exceptional credit scores (740+).
Bad-credit auto loans for refinancing are available as well, usually at higher interest rates.
Lenders also have restrictions on a car’s age and mileage. Lenders may have minimum and maximum loan amounts or a maximum loan-to-value (LTV) ratio. The car’s age may impact the loan amount and terms available.
It’s possible to refinance an upside-down car, but your options may be limited. You might be able to roll the negative equity into the new loan, but your interest rate will likely be higher.
Improve your chances of qualifying by making extra payments toward the principal to close the gap between the loan balance and the car’s value. Build up your credit score by paying other debts on time.
How to refinance a car loan, step by step
Ready to refinance your auto loan? Here are five steps to help you through the process.
1. Review your current auto loan
Take a look at your current auto loan contract to review the following information:
- Current monthly payment
- Annual percentage rate (APR)
- How many months are left to pay
- Remaining balance
- Prepayment penalty (if any)
Plug these numbers into our auto loan refinance calculator to see how much you could save by qualifying for a lower rate or changing the terms of the loan.
2. Check your credit and car value
Review your credit score to gauge the interest rate ranges you may be offered and determine whether the time is right to refinance. Check your credit score for free with LendingTree Spring without impacting your credit score.
Use sites like Kelley Blue Book (KBB) or Edmunds to estimate your car’s current market value or gather cash offer quotes from online retailers such as CarMax and Carvana. Compare the value with the remaining loan balance to see if you’re upside down on the loan.
3. Compare refinance offers
You can prequalify for auto loan refinancing and receive multiple offers on LendingTree without impacting your credit score. Remember that the prequalified offers are only estimates, not a firm loan offer. You won’t know the final rate and repayment term until you submit an official application.
Use the auto loan refinance calculator to compare these estimates. You can pick the lender offering the best deal for your situation.
4. Apply and review terms
Gather this information to make the application process go smoothly:
- Vehicle Identification Number (VIN)
- Exact mileage of the car
- The state the car is registered in
- The 14-day payoff amount
- Lender’s name and contact information
- The loan number
Submit an official refinance application even if you have received a prequalified offer from the lender. The official application will result in a hard credit check that will reduce your credit score.
You can apply to multiple lenders within a 14-day rate-shopping window without further impact to your credit score.
Use the official offers to select the one that will save you the most money over the life of the loan. Other offers will expire within 30 to 60 days.
5. Confirm payoff and close original loan
Your new lender will likely handle the paperwork and pay off your old loan directly. Some lenders, such as LightStream, provide unsecured auto refinancing and may pay you the funds to give to your old lender.
If your old loan has a payment due soon, contact the lender to let them know you are refinancing to avoid any late fees. You might have to make another payment on your old loan, but this will reduce the total amount you owe on the car when your new loan starts, typically in 30 days.
Frequently asked questions
If you refinance at a lower APR while keeping the same loan term, you will save money. Refinancing at a longer term can lower your monthly payment, but you may pay more interest over the life of the loan.
LendingTree’s refinancing study found that those who refinance and shorten their loan term save the most money — $6,291 on average.
Some lenders require you to keep the current financing for at least 90 days before you can refinance. Dealers usually take that long to complete the title and loan paperwork. Check whether the new lender specifies how much time must be left on the current loan — typically 12 to 24 months.
You can refinance a car loan if you’re upside down, but you will have to pay off the negative equity by rolling it into the new loan or making a lump sum payment. You will likely have a higher interest rate as well.
Applying for any loan can lower your credit score due to the hard pull on your credit history. Waiting a few months between loan applications allows your credit score to recover.
The biggest mistake people make when refinancing a car loan is failing to understand the cost of extending the loan term to get a lower payment.
Even with a lower interest rate, a longer term means you may pay more interest on the loan. And a longer term makes it more likely you will be upside down on the car, as the car’s value depreciates over time.