5 Steps To Refinance Your Car Loan
6 MIN READ
Published January 19, 2024 | Updated January 30, 2024
When you refinance a car loan, you take out a new loan to replace your existing one. The new loan usually has a lower rate, allowing you to save money. You may want to consider auto refinancing if your credit score has improved, you want to lower your car loan payments, or you want a different repayment period.
The application process is quick and is usually done online, and, in many cases, you can get an immediate decision. In this guide, we’ll talk about how to refinance your car and walk you through each step of the process.
When You Should Refinance Your Car Loan
Whether auto refinance is a good idea will depend on a number of factors, like how much car debt you have, interest rates you qualify for, and your credit score. Here are a few scenarios where refinancing a car loan makes sense:
- Your credit score has increased, allowing you to qualify for better loan rates.
- Current market rates are lower compared to when you took out the loan.
- You want a shorter or longer term.
- You have a higher interest rate with your current lender and want to work with a different lender.
- You want to lower your car payments.
“It's always good to look at your current interest rate compared to market interest rates,” says Teresa Dodson, debt expert and founder of Greenbacks Consulting. "I do this yearly. Two points on a loan can make a big difference in either lowering a payment or paying your loan off faster,” Dodson shares.
Reasons Not To Refinance an Auto Loan
Refinancing an auto loan is not for everyone, and it’s not right for every situation. Here are a few situations where refinancing auto loans is unwise:
- Your credit score has gone down since you purchased your car.
- You have an upside-down car loan, where you owe more on the loan than the current value of your vehicle.
- You have a very old car, which may make it difficult to find a lender willing to refinance.
- There’s a prepayment penalty on your existing loan.
- You purchased a car less than six months ago, which makes it unlikely that your credit score has improved significantly.
- You don’t have much outstanding loan balance.
How To Refinance a Car Loan
Vehicle refinance involves taking out a new car loan at new terms to replace your current loan. If you’re wondering how to refinance an auto loan, we’ve listed the steps you’ll need to follow below.
1. Review Your Existing Car Loan
Before you start the car refinancing process, take some time to review the details of your current auto loan. Your loan contract should provide you with the necessary information, such as the loan annual percentage rate (APR) and current monthly payment.
You’ll also need to contact your lender to find out your payoff amount and the number of months remaining on your original loan. Additionally, you’ll want to find out the current value of your vehicle. You can use online resources like Kelley Blue Book to estimate what your vehicle is worth.
2. Check Your Credit Score
Car refinance is only helpful when you’re able to qualify for a lower interest rate than what you’re currently paying. Your credit history can help you determine what interest rate you may qualify for.
If you’ve made on-time payments on your auto loan and kept your accounts to date, your credit score may have improved. Get a free credit report from all three credit bureaus (Experian, Equifax, and TransUnion) to check if you have a good credit score for a car loan.
Keep in mind that your lender will also look at other criteria when checking your eligibility, such as the debt-to-income ratio for car loans.
3. Compare Lenders
You can get the best possible deal if you compare lenders and the terms they offer for auto loan refinancing. You can prequalify for auto loans with multiple lenders to receive payment and rate estimates to get an idea of whether refinancing makes sense.
Pre-qualification is only an estimate and involves a soft credit check. Alternatively, you can get a pre-approval for an auto loan, which involves a hard inquiry but gives you a more accurate estimate of what you may qualify for.
When comparing different financial institutions and their loan offers, pay special attention to the APRs, loan terms, and the total interest you’ll pay over the life of the loan.
4. Get The Necessary Documents
Streamline the process by ensuring you have the necessary documents and information on hand. In most cases, you’ll need to submit the following documents to refinance a car loan:
- Driver’s license
- Social Security number
- Vehicle Identification Number (VIN)
- Vehicle registration
- Proof of insurance
- Loan payoff statement
- Proof of employment or pay stubs
5. Apply for a Refinance Loan
Once you have finalized a lender you want to work with, you’ll have to submit a formal loan application, even if you’ve pre-qualified. Fill out the application form and submit the documents requested.
You’ll need to sign the loan documents to finalize auto refinancing. Your lender may provide you with the funds to pay off your old loans or may pay it off on your behalf.
Can You Refinance a Car Loan With Bad Credit?
Refinancing a car loan with bad credit is possible, but it may be difficult to get a competitive interest rate if your credit score hasn’t improved since you purchased your vehicle. There are many lenders that offer car loans for bad credit, but they usually charge high-interest rates.
Refinancing an auto loan is only an advantage if you can get a better interest rate. If market rates have decreased since you got the loan, you may be able to get a better deal. Check the historic auto loan rates to tell if refinancing is a good idea.
Browse Top Auto Refinance Loans and Save Money Today
If you’re looking into refinancing your car loan, we’ve reviewed over 20 lenders to determine the top three choices today. We prioritized lenders based on availability, ease of application, rates, and terms, and the lender’s reputation.
APR: Starting at 4.50%
Loan Amounts: Not specified
Terms: 12 to 84 months
APR: Starting at 4.54%
Loan Amounts: Minimum $5,000
Terms: Up to 96 months
APR: Starting at 5.24%
Loan Amounts: Minimum $5,000
Terms: 24 to 72 months