Requirements for refinancing a car loan

Whether you should refinance your vehicle loan often depends on whether you’ll save money month-to-month or overall. Before signing off on a new loan, you need to confirm that you and your vehicle fit the requirements — and that you can qualify for a lower refinance interest rate.

Though requirements vary among lenders, keep an eye out for the most common. Lenders have expectations for your credit score, time left on the loan and your vehicle’s age.

Common auto refinance requirements: Quick look

Requirements for your current loan

A key first step in refinancing an auto loan is to examine your current loan closely. Lenders typically have requirements regarding the time and amount remaining.

Time left on loan

Typically, lenders want you to be current on your loan payments, be at least six months into the loan and have at least six months left. This allows the lender to see that you have an established history of payments — and still have enough payments left that it will profit off interest.

Amount left on loan

Minimum loan amounts vary by lender, but you can expect to need at least $3,000 to $7,500 left on your loan. Since refinancing is essentially taking out a new auto loan, lenders don’t want to offer small amounts because they won’t be able to make as much money from them.

And if you bought a particularly expensive car, you may be unable to refinance immediately. Finding auto refinance loans for over $75,000 can be a challenge, though some lenders offer larger loans. Navy Federal Credit Union, for instance, offers refinance loans with no maximum amounts.

Vehicle requirements to refinance your car

Lenders don’t just care about your existing loan — they have requirements around the vehicles they’re willing to finance, too.

Mileage and model year

If you bought a heavily used car or have racked up lots of miles and want to refinance the loan, you may not be able to. Lenders tend to have a cap of 100,000 to 150,000 miles.

You may not qualify with an older car, even with fewer miles. Typically, lenders set a hard limit at 10 years old. Some lenders may require a car under eight years old to refinance the loan.

Car type and titles

Lenders won’t be willing to refinance all vehicle and title types. Personal vehicles with clean titles will be the easiest to refinance, and many are unwilling to refinance commercial vehicles. In addition, some lenders may not refinance vehicles that the manufacturer discontinued.

For example, Capital One does not refinance vehicles that are no longer in production, such as Suzuki or Isuzu.

Finding a refinance for a salvage title vehicle will also be more difficult. Some lenders do not offer financing for vehicles with a salvage title. Others may require a note from the mechanic to consider financing a salvage title vehicle.

The mechanic’s note will likely need to state that the car has been rehabilitated and is now road-worthy. You may also need an insurance statement from your carrier stating that you can carry insurance on the vehicle.

Loan-to-value ratio

Since the vehicle is collateral for the loan, the loan-to-value ratio (LTV) shows how much of a risk the lender is taking on. A higher risk means the lender may not accept the loan or offer higher interest rates.

The LTV measures what you owe compared to the value of your vehicle. It is calculated by looking at the total you owe on your loan divided by your vehicle’s actual cash value (ACV). The final number is expressed as a percentage.

Vehicles’ values go down over time. This means you can have negative equity, owing more than the car is worth. In this case, you would have an LTV higher than 100 percent.

Having an LTV over 100 percent doesn’t mean it’s impossible to refinance, but it can make it more difficult. Most lenders look for an LTV below 125 percent. However, the lower your LTV, the better interest rate you can get.

Credit requirements for auto loan refinancing

Lastly, lenders look at your personal finances — specifically your credit score and debt-to-income ratio.

Credit score

As with any loan, your credit score will be a major factor. There are pros and cons to refinancing an auto loan, but there are more pros if your credit score has improved since you first bought your car. Refinancing is usually smart if you received a poor interest rate and have since raised your credit score.

Exact lender requirements for your credit score vary. Generally, the higher your score, the better your interest rate will be. Most lenders require at least 600. You likely won’t get a better rate by refinancing with a score lower than this. It could even cost you more overall, especially if you increase your loan term to reduce your monthly payments.

Debt-to-income ratio requirements

Your debt-to-income ratio measures your debt against your income and is often expressed as a percentage. The acceptable range varies from lender to lender. Typically, anything below 36 percent is considered good, and adequate ratios range from 36 percent to 49 percent. You may want to reconsider refinancing if you have a DTI of 50 percent or higher.

Paying down your current debts is the simplest method to lower your DTI. Reducing installment loans or credit card bills may help prove you are financially responsible to a new lender. It could also have a positive impact on your credit score.

Consider using a calculator to find your DTI. That way, you’ll know how much debt you need to pay down before applying.

The bottom line

If you time it right, refinancing your car loan can be wise. But, not every borrower will qualify. To determine if you are eligible, consider your current loan, vehicle and credit standing.

This way, you can compare auto loan refinance rates to find the best new loan that fits your needs.