How to refinance your car loan

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 with comparing lenders and picking the right time to refinance.

How to refinance a car loan in 6 steps

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 — or preferably both.

1. Review your current loan

Most lenders require a minimum loan amount to refinance, most often between $3,000 and $7,500. Check your payoff amount online or by contacting 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.

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 paid down credit card debt and made on-time payments on your accounts. Lenders will view you as less of a risk and may offer you better rates. However, 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: to get a better interest rate or a more affordable monthly payment.

Scenario 1: You can get a better rate

Car loan refinance rates may be better than your current rate if:

• You took out your auto loan when car loan interest rates were high and have since dropped.
• Your credit score has improved — or your debt-to-income ratio (DTI) has lowered — since you took out your loan.
• Your car has positive equity, meaning you owe less than the car is worth.

Scenario 2: You need a lower monthly payment

You can refinance in order to swap to a longer term, which may help lower your monthly payment. However, if you don’t also lower your interest rate, you will pay more interest over time. Compare the pros and cons of refinancing before making final a decision.

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 worth less than what you owe. A lender may be much less willing to refinance if you’re already underwater on your current loan.

5. 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 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 go over your application and documents for errors before submitting. 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.

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 loan bank 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.

Keep in mind that you can refinance multiple times. This may be something to consider if your situation changes and you can get better rates, terms or perks — or if interest rates have dropped substantially since your first refi.

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.

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.

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.

• Requirements for refinancing: Every bank or lender has its own criteria to determine your eligibility. Be sure you are not upside-down on your loan and are current on payments.
• 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 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 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. If refinancing isn’t right for you, consider alternatives, like trading in your car.