How to refinance your car loan
Key takeaways
- Refinancing your auto loan is often a good financial choice if you are able to secure a better rate or a lower monthly payment.
- Consider the amount of time remaining on your loan before exploring options to ensure you qualify for the new loan.
- To choose the best lender, compare your current loan against potential lenders to see if you will save money — both on your monthly payment and overall.
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 and you use it to pay off your current one. The new loan should offer a benefit that your old loan didn’t, such as a lower interest rate or lower monthly payment — preferably both. If you took out a high-interest dealer financing or need to switch to a lower monthly payment, refinancing could help you save money or even pay off your loan faster.
You can refinance your auto loan with bad credit, but it may be more challenging for you to find a better rate than you currently have.
How to refinance a car loan
Refinancing a car loan is similar to getting an auto loan to buy a new or used vehicle. Start by reviewing your current finances and loan documents, then take the time to research your options and find the lender that offers you a better rate or lower monthly payment. Preferably both.
1. Review your current loan
Most lenders require a minimum loan amount between $3,000 and $7,500 to refinance your current loan. Check your payoff amount online or contact your current lender to determine if you have enough remaining loan balance to qualify for refinancing.
You will likely need to pick a loan term of at least 12 months, although most lenders have minimum refinancing terms of 24 or 36 months. You can still refinance if you have less time left on your loan, but refinancing may not save you any more money than if you finish paying off your current loan instead.
It is also important to consider a few things about your current loan before you refinance:
- Your interest rate and total interest paid.
- Your current monthly payment.
- The total cost of your current loan.
- The number of months left to repay your current loan.
Gather that information to compare your current loan with options from new lenders.
You are unlikely to qualify for a car refinance unless your car — and current car loan — meet these general requirements:
- You have at least six months left on your loan.
- You have a current balance between $3,000 and $7,500.
- The mileage is between 100,000 and 150,000.
- The loan-to-value is below 125 percent.
2. Check your credit score
You are more likely to receive a lower interest rate from a lender when you have good credit. Check your credit score before you start applying. This will help guide you toward lenders you qualify for and predict potential rates.
Your credit score may have improved since your first loan, for example, if you’ve paid down debt and made on-time payments on your accounts. Lenders will view you as less of a risk and may offer you better rates. Your payment history and current debts also matter to lenders, so be sure to take this into account when considering offers.
Even if you need to refinance with bad credit, you may still be able to refinance your loan at a lower rate by finding the right lender.
3. Decide if refinancing is the right financial move
There are two main reasons to refinance. Either you are able to get a better interest rate or a more affordable monthly payment, and both are possible if you are able to qualify for a decent offer.
4. Estimate your car’s value
Resources like Kelley Blue Book and Edmunds make estimating your car’s value relatively simple. Your car will need to meet specific lending requirements, such as being no older than 10 years or having over 100,000 miles. These factors lower the potential resale value significantly, making your loan riskier for the lender.
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.
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.
Organize your documents ahead of time to speed up the refinancing timeline. Be prepared to contact both lenders to ensure your payoff and payments go to the right places.
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 in interest. Also, check your current loan for fees. Some lenders charge a prepayment penalty, making refinancing more expensive.
Continue paying on your old loan until it’s paid in full. You’re still legally responsible for making those payments until the loan is paid off completely.
Where to refinance an auto loan
Sometimes, you can refinance with the lender who funded your original loan. Before taking that route, however, it’s wise to consider additional refinancing options to find the best deal.
- Banks
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Features: In-person customer support but potentially stricter underwriting criteria.
Who it’s best for: Borrowers with good to excellent credit who want access to the lowest rates available.
- Credit unions
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Features: Products are only available to members, but credit unions typically offer lower interest rates.
Who it’s best for: Borrowers with an established relationship or membership with the institution.
- Online lenders
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Features: More flexible lending requirements with faster funding timelines but potentially higher average rates.
Who it’s best for: Borrowers who want the convenience of a fully online application experience.
Avoid any type of car title loan. They may be tempting in a financial crunch, but the high rates and fees put you at risk of losing your car to default if you can’t repay the loan.
Additional factors to consider before refinancing
Before jumping into the refinancing process, make sure it makes sense for your finances and long-term money goals.
- 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.
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