How to refinance a car loan in 5 steps

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In a Nutshell

Refinancing an auto loan could help you save money in the long run by reducing your interest rate, lowering your monthly payments or enabling you to pay off your loan sooner. There are steps you can take to help determine if you could qualify, and to help you zero-in on an offer that might work for your situation.
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If your financial situation has changed or you just want better car loan terms, refinancing your car loan could be a good move.

Refinancing a car loan involves taking on a new loan to pay off the balance of your existing car loan. Most of these loans are secured by a car and paid off in fixed monthly payments over a predetermined period of time — usually a few years.

There are many reasons that you might consider refinancing your car loan. Maybe your credit has improved and you might qualify for a lower interest rate, or your financial situation has gotten better and you want to remove the co-signer from your original loan. Refinancing with a new loan could mean getting better terms and rates that are more in line with your current financial needs and long-term plans.

Read on for tips to help you determine if a refinance is right for you, and to learn how to refinance a car loan.

1. Determine if auto refinancing makes sense for you

While refinancing can offer many benefits, it’s not a one-size-fits-all solution. Before going too far into the process, ask yourself these questions.

What’s the state of your current auto loan?

Revisit the terms of your current loan so you can compare them apples to apples when you shop for auto refinance opportunities.

When shopping, look for the following:

  • Current monthly payment
  • Time remaining on the loan
  • Current payoff amount
  • Interest rate

Then consider your goals: Are you interested in lowering your monthly payment? Or just looking for the lowest interest rate? Remember that extending the life of your loan will likely cost you more in the long run, while shortening it can save you money.

Is there a prepayment penalty?

If your current loan has a prepayment penalty, it may not be worth trying to refinance. A prepayment penalty means that you’ll be hit with a fee for paying the loan off early.

What fees will you be responsible for?

There could be fees needed to reregister the vehicle and transfer the title after refinancing. These fees vary by state, so it’s worth looking into what it costs in your state before refinancing.

Is your loan balance higher than the value of your vehicle?

Kelley Blue Book offers resources and tools for finding used-car values. If the outstanding loan amount is higher than the car’s market value (referred to as being upside down on a loan), you may have trouble getting approved for a new loan or see little difference in the new loan terms offered to you. Some lenders may allow you to roll the outstanding balance on your current loan into your new loan, but keep in mind that this will add to your overall debt.

How old is your car?

Lenders may have restrictions on whether they will refinance a car. For example, some lenders won’t allow a refinance on cars over eight years old or with more than 100,000 miles on the car.

Has your credit improved?

If your credit has improved, refinancing could result in a lower interest rate, which could save you money in interest over the life of the loan. But if your credit hasn’t improved, getting a lower rate may be difficult unless interest rates have dropped since you got your current loan.

If you’re not sure, check your credit to get an idea of where your credit’s at. Checking your credit reports can also help you identify any potential errors that may be impacting your credit scores and work on disputing them.

When does refinancing a car loan make sense?

2. Collect the necessary documents

If you decide to move forward with a refinance, you’ll need to gather some documents and information before you can start the process. Here’s some of the information you may need to have on hand.

Personal information

You may need information like your Social Security number, previous addresses, and how much you pay in monthly mortgage or rent payments.

Proof of income

Lenders want to know that you’ll be able to repay your loan. A paycheck stub or a tax return may be needed. You might also be asked to provide your employment history.

Evidence of auto insurance

You may need to provide proof of insurance to your lender. If so, you’ll need to prove this to your lender with an insurance card or other proof of insurance.

Information on your current loan

You may need to know the balance on your current auto loan, as well as that lender’s information. It will also be helpful to know your interest rate and length of the loan when shopping to make sure you’re getting better offers.

Information about the car

You’ll want to have the make, model, mileage and year handy. The vehicle identification number, or VIN, can often be found in the driver’s side lower corner of the windshield, though the exact location may vary depending on the make and model of the car.

3. Consider applying for prequalification

Take some time to shop around and see which offers you may qualify for. Applying for prequalification can be a good place to start. To get prequalified, the lender will look at certain information, like your credit and type of vehicle. Prequalification is typically considered a soft inquiry, which won’t hurt your credit all on its own. But prequalification is not a guarantee of approval, and if you decide to apply for the loan, you’ll ultimately have to apply for it — and face the hard inquiry that goes along with it.

Some credit-scoring models account for rate shopping by allowing you to lump multiple auto refinance applications during a certain time frame into one hard inquiry. This window can vary by credit-scoring model.

For example, VantageScore 3.0 counts multiple inquiries within a 14-day window as a single inquiry, while some newer FICO models lump credit inquiries within 45 days into one inquiry.

Check around with several lenders and compare the interest rates, loan terms and total cost of borrowing available to you. Find out if any of the loans qualify for an autopay discount. Opting into this feature may lower your interest rate and help ensure you don’t forget a payment — a win-win for you.

You may be tempted to choose an offer with a longer loan term, which could result in a lower monthly payment. But keep in mind you’ll end up paying more in interest and increase your risk of becoming upside down.

Above all, consider the main reason you want to refinance and whether each loan’s terms address that need.

By doing your research, you can be more confident that when you choose a loan you’re selecting the best offer available to you.

4. Apply for an auto refinance loan

Once you’ve shopped around, collected all of your information and made a decision, you’re ready to apply.

You’ll need to complete a loan application for the lender you choose. This is where the documentation you gathered can come in handy, as you may have to provide it in the application. This application will count as a hard inquiry, which can lower your credit scores by a few points.

If your loan is approved and you sign the loan paperwork provided by the lender, you should get a document from your lender with all the terms of your new loan. Keep a copy for your records, as it will include details on when your payment is due, the minimum amount you’ll need to pay each month and your options for making loan payments.

5. Pay off your old loan and start making new monthly payments

Depending on your lender, much of the transition from your old loan to your new one can be taken care of by the lender. For example, your new lender might pay off your old loan. But be sure to reach out to your previous lender to get confirmation that it’s been paid in full before you stop making payments on that loan.

Once your original loan is paid off, you can focus on making on-time payments on your new loan each month, which may help boost your credit. You can use Credit Karma’s Auto Refinance Calculator to estimate your monthly payments and how much you may be able to save by refinancing your current auto loan.

What’s next?

Refinancing can be a great way to find an auto loan that best fits your needs. By taking the time to collect key information and do your research, you may get better loan terms that can save you money by providing a lower rate.

If you aren’t sure whether an auto loan refinance is right for you, consider other ways you might be able to lower your car payment.

FAQs about refinancing your car loan

Can I refinance my car loan through the same lender?

Many lenders allow you to refinance existing loans, but not all do. Each financial institution has its own refinance policies. For example, CapitalOne doesn’t let you refinance existing auto loans, but Bank of America does.

What do you need to refinance a car?

First, determine if auto refinancing makes sense for you. Look at your current loan terms, interest rate and monthly payment — then, shop around for auto refinancing and compare the quoted terms to your current loan. You can begin collecting documents with proof of income, vehicle information, current loan terms and proof of insurance, and get prequalified. Once you formally apply and are approved, your new lender may pay off your old lender and you can start making payments to your new lender.

Does refinancing your car impact your credit score?

Yes. When you apply for new loans, lenders run your credit reports, often triggering hard credit inquiries — which can drop your credit scores by a few points for a while. You can sometimes avoid getting multiple credit hits while rate shopping, though. That’s because a number of credit scoring models will lump a number of hard credit inquiries into one, if they’re made within a certain time frame. Then again, your scores could also take a bit of a hit because refinancing results in an older loan being closed and replaced by a new loan. This decreases your average credit age, which can pull your scores down.

About the author: Liz Knueven is a personal finance writer with a BFA in writing from Savannah College of Art and Design. Liz has been published by Business Insider, and LendingTree. Read more.