How to Refinance a Car Loan in 6 Steps
Refinancing your car loan to a lower rate could save you money on interest and reduce your monthly bill. You can use the savings toward other financial goals like paying off credit card debt or saving for a house.
You typically need good credit and a history of on-time payments to qualify for auto loan refinancing. Here’s a quick guide on how to refinance a car loan and when to consider waiting.
How does refinancing a car work?
When you refinance your car loan, you get a new auto loan to pay off and replace your original loan. You can refinance with your current lender or find a new lender. The application process for a car loan refinance is generally quick, with many lenders making an immediate decision.
Depending on your current auto loan balance and credit profile, you could potentially save thousands of dollars by refinancing your car loan to a lower rate. You can also refinance multiple times to maximize your savings. However, some lenders charge refinancing fees or prepayment penalties, which could make refinancing not worth it.
Auto loan refinancing in 6 steps
Ready to refinance your car loan? Here are six steps to help you through the refinance process.
1. Review your current auto loan
Take a look at your current auto loan contract to review the following information:
- Current monthly payment
- APR rate
- How many months you have left
- Remaining balance
Enter these numbers into our auto loan refinance calculator below to see how much you could save by switching to a lower rate.
When can you refinance a new car?
Most lenders have restrictions on how soon you can refinance a car loan. Here’s a general timeline of what to expect:
- 60 to 90 days into the car loan: It typically takes this long for the dealer to transfer the car title and complete loan paperwork, which needs to happen before an auto refinance lender will consider your application.
- Six months into the car loan: Your credit score should have recovered from any hard credit inquiries from when you took out the original loan. It may have even improved if you’ve made on-time payments. However, some lenders won’t refinance until you’ve hit the six-month mark.
- With at least two years left on the car loan: Your credit score has likely increased with regular payments, making this an ideal time to qualify for a refinance. However, it’s probably not worth refinancing a car with less than two years left on the loan, since the savings could be negligible, even with a reduced APR.
When to refinance a car depends on your current credit score, the car’s equity and if you can qualify for a lower rate.
2. Check your credit
Knowing your credit score can help gauge your potential interest ranges and whether refinancing is a smart move right now. You can check your credit score for free with LendingTree Spring or access your credit report with AnnualCreditReport.com without impacting your credit score.
If you’ve kept up with your car loan and other debt payments, it’s likely that your credit score has increased. In that case, you might be eligible for an auto loan refinance with a lower rate, which could save you hundreds or thousands in the long run.
3. Estimate your car’s value
Finding your car’s value can help you decide if a refinance is worth it. Sometimes your car value drops more than expected, with the remaining loan balance exceeding the car’s worth — which is called negative equity or an upside-down car loan.
You can estimate your car’s value by using industry guides like Kelley Blue Book (KBB) or Edmunds.com or by gathering cash-offer quotes from online car retailers like Carvana and CarMax.
If you still want to refinance your car loan with negative equity, you can apply extra monthly payments to the principal. Once your loan has positive equity, you can approach refinance lenders to see what they have to offer.
4. Gather essential documents
Lenders typically require certain documents in order to verify your identity, evaluate your creditworthiness and determine the value of your car. Here is an overview of some common car loan documents you might need to provide during your auto refinance application.
- Personal information: You’ll likely have to show your driver’s license or upload a photo of it, in addition to providing your current address, phone number and Social Security number.
- Proof of income: Your lender will want reassurance that you can make loan payments. You can upload recent pay stubs, W-2s, tax returns or bank statements.
- Proof of insurance: Some lenders need verification of car insurance, such as a monthly statement or a copy of your insurance cards.
- Vehicle information: Be prepared to supply the vehicle identification number (VIN), make, model, year and registration number.
- Current loan information: Have the details of your current auto lender, your loan account number and the vehicle payoff amount ready.
5. Compare auto refinance lenders
Many lenders offer promotional rates and deals as a way to get people in the door, such as cash-out auto financing. However, it’s worth shopping around and not jumping on the first attractive rate you see. You can apply to several car refinance companies to get prequalified loan offers without hurting your credit score.
Use our auto loan refinance calculator to compare your current loan with your prequalified estimates. By crunching the numbers and comparing interest rates, you can see your potential savings and pick the lender offering the best deal. Just keep in mind that prequalified offers are just estimates — you won’t know your final rate and repayment term until you submit an official application.
6. Apply and finalize your new loan
Your next step is to submit an official refinance application, which will result in a hard credit check. You must complete this step even if you received a prequalification offer from the lender. If you want to apply to multiple lenders, you can do so within a 14-day “rate-shopping” window without further impact on your credit score.
If you receive multiple offers, pick the one that will save you the most money over the life of the loan. You won’t have to do anything to decline other offers, which will expire within 30 to 60 days.
Your new lender will likely handle the paperwork and pay off your old loan directly by sending the money to the old lender. Some lenders, like LightStream, provide unsecured auto refinancing and may pay you the money 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 don’t worry, it will reduce the total amount you owe on the car when your new loan starts, typically in 30 days.
What to consider before refinancing
While refinancing can be a great way to save money and reduce your monthly car bill, there are some pitfalls to consider before moving ahead.
- Extended warranties and other add-ons: Many companies will try to sell extended car warranties and all types of insurance products when you refinance. You are not required to purchase anything extra in order to accept a car refinance loan.
- Prepayment penalties: While paying off debt early is generally good, some lenders charge expensive fees for early payoffs. Check whether paying off your original loan ahead of schedule is financially worth it.
- Time left on your existing loan: If your existing loan has less than two years remaining, you might be better off making extra payments to pay off your car faster.
- Picking the right term length: While picking a long-term car loan can lower your monthly payment, it can also significantly increase the loan’s total cost. Going with a short-term loan is generally best, especially if saving money is your ultimate goal.
Should I refinance my car loan?
The decision to refinance your auto loan depends on several factors, such as qualifying for a lower interest rate, needing a longer repayment term or being able to get better terms by adding a creditworthy cosigner.
Refinancing isn’t for everyone, though. Here are some situations where you should avoid or postpone a car loan refinance:
- Late payments: If you’ve made late payments on your current loan or other debts, you might have difficulty qualifying for a refinance.
- Prepayment penalty: Check your existing loan contract to see if your lender charges a prepayment penalty for an early payoff. If so, the fee might negate the money saved from refinancing.
- Balance exceeds the car’s value: Lenders will likely reject your refinance application if your current loan is higher than the car’s worth.
- Old vehicle: Some lenders restrict what they will fund or refinance, such as a car being over a decade old or having over 140,000 miles on it.
Alternatives to car loan refinancing
If you can’t find a lower rate or don’t have the credit score needed for an auto refinance loan, here are some alternative solutions to help improve your financial situation.
Car trade-in: Trading in a car instead of refinancing can help you upgrade your wheels while possibly securing a lower interest rate. When you trade in a vehicle, the value gets applied to the new purchase, and in some states, it could reduce what you owe in taxes.
Debt consolidation: If you’re drowning in bills, a debt consolidation loan could combine everything into one low-rate bill.
Personal loans: You can use personal loans for various purposes, such as paying off debts or covering emergency expenses. You can also use a personal loan to buy a car.
Home equity loans or HELOCs: Use your home’s equity to borrow emergency funds as needed with a home equity loan or line of credit. Just be aware that you risk losing your home if you can’t repay the debt.
Refinancing an auto loan is generally worth it if you can save money on interest. You can also refinance a car to extend the car’s term to get a lower monthly bill, but you will likely incur more interest charges over the duration of the loan.
Most lenders prefer working with borrowers with good credit. While you can refinance with bad credit, you could end up with a higher rate than you currently pay.
While your potential refinance savings depends on your credit profile and other criteria, here’s a refinancing example:
Let’s say you start with a $30,000 loan with an 8% interest rate and 60-month term. Your monthly payments would be $608, with a total loan interest of $6,498. After one year of payments, your balance would be $24,917.
If you refinance after the one-year mark to a lower rate of 6%, your new monthly payment would be $585, with a total remaining interest of $3,163. In this scenario, refinancing to a lower rate could save you $1,104 in interest charges.