How to Refinance a Car Loan in 8 Steps

Vault’s Viewpoint

• Refinancing your auto loan can help you lock in a better interest rate or lower your monthly payments.
• Before you apply for auto loan refinancing, make sure you know your credit score and car value.
• It’s a good idea to shop around and compare offers from multiple lenders so you can pick the best auto loan refinance for your unique goals.

Review Your Current Loan

Get a hold of your current car loan contract or agreement. Take a close look at it so that you know your interest rate, monthly payment and how much time you have left to pay it off. You should also figure out your remaining payoff amount.

If you can’t find your paper contract or agreement, you can always log in to your online account or reach out to your lender’s customer service department. Once you become familiar with your existing loan, you’ll find it easier to shop for auto refinance offers that cater to your particular goals.

Understand Your Credit

Next, determine where you stand credit-wise, as most lenders will consider your credit when you apply for auto loan refinancing. Visit AnnualCreditReport.com to pull free copies of your reports from the major credit bureaus. Be sure to dispute any errors or inaccuracies you find with the appropriate bureau.

You can also check your credit score through a free credit monitoring website or credit card company, such as Amex’s MyCredit Guide or Capital One CreditWise. Note that if you have bad credit, it will be more difficult to qualify for an auto loan refinance, especially if your primary goal is to secure a better interest rate. In this case, you might want to improve your credit and pursue refinancing at a later time.

Estimate the Value of Your Car

Before you go ahead and look for refinancing offers, you should know what your car is worth. To do so, you can go to a reputable resource like Edmunds or Kelley Blue Book and plug in some basic details about your car, like its year, make and model.

You may be able to refinance up to 180% of your vehicle’s value, depending on the lender. Keep in mind that if you’re upside down on your current car loan or owe more on it than your car is worth, a lender might be hesitant to extend you an offer.

Shop Around

Not all auto refinance offers are created equal. While you may be tempted to choose the first one you receive, doing so can be a mistake that increases your overall cost of borrowing. It’s well worth your time to shop around and explore all your options from banks, credit unions and online lenders.

This way you can compare interest rates, terms, fees and perks and zero in on the ideal loan for your particular situation. Fortunately, many lenders will let you prequalify on their websites so you can check potential offers without negatively impacting your credit score.

Determine If Refinancing is Worthwhile

Once you find an auto refinancing offer you like, make sure it’s worth pursuing. Take a close look at your current monthly payment, the time you have remaining on your loan, your current outstanding balance and interest rate. Then, think about your goals.

Maybe you hope to lower your interest rate. Or, perhaps you want smaller monthly payments so you have more wiggle room in your budget. Determine if the offer can help you meet your goals. If the answer is “yes”, move on to the next step. Otherwise, continue your search for offers or put off refinancing until it makes more sense.

“Keep in mind that some lenders may try to sell you warranties or other add-ons when you refinance for your car loan, but you’re not required to purchase these extras.”

— Anna Baluch

Collect Your Documents

If you decide that an auto refinance is a good move, it’s time to collect the paperwork you’ll need to apply. While every lender has different requirements, most of them will require the following:

• Personal information: You’ll be asked to share basic details about yourself like your name, address and date of birth. You might also have to provide your Social Security number.
• Proof of income: Proof of income will show a lender whether you have the means to repay your new auto loan. W2 forms, pay stubs, bank statements and tax forms may all be accepted.
• Proof of residency: Lenders want to know that you live where you say you live. You can prove this through recent utility bills, monthly mortgage statements, lease agreements or property tax bills.
• Details about your current car loan: You’ll have to provide the balance, interest rate, repayment term and monthly payment on your existing auto loan. You might also need to state your current lender.
• Vehicle information: Most lenders have restrictions on the types of vehicles they’re willing to refinance. That’s why they’ll likely ask you for the year, make, model, mileage and vehicle identification number (VIN) of your car.

Apply for an Auto Refinance Loan

Now you can fill out the loan application for the lender you’ve chosen. Keep your documents and personal information handy to speed up the process. Be sure to double-check your application for accuracy to avoid delays due to inaccuracies or missing information. Note that once you formally apply for an auto loan refinance, the lender will perform a hard credit inquiry, which will temporarily bring down your credit score by a few points.

Repay Your Old Loan and Start Making New Monthly Payments

Once you get approved for auto loan refinancing, the lender may pay off your old loan. If they don’t take care of this, it will be your responsibility. After you confirm that your original loan has been repaid, you should start making timely payments on your new loan. Consistent on-time payments can increase your credit score and set you up for favorable terms on auto loans and other financing products in the future.

Reasons to Refinance Your Car Loan

There are a variety of reasons you may decide to refinance your auto loan, including:

• Lower Interest Rate: If rates have declined or your credit score has improved since you first took out your car loan, auto loan refinancing may help you land a better interest rate. A lower rate can save you hundreds or even thousands of dollars over the life of your loan.
• Smaller Monthly Payment: A lower interest rate and/or a longer repayment term through an auto loan refinance can reduce your monthly payment. This may be a huge plus if you’re on a tight budget and would like some extra spending money each month.
• Additional Cash: Some lenders will allow you to access cash through a cash-out refinance. If you have substantial equity in your car and need to cover an expense, a cash-out refinance may be a good idea.

When You Shouldn’t Refinance Your Car Loan

Sometimes, auto loan refinancing can do more harm than good. If any of the following apply to you, you might want to think twice about this strategy.

• You drive a very old vehicle or one with many miles.
• You can repay your current loan in a year or two.
• You can’t qualify for better terms when you prequalify with multiple lenders.
• You’re upside down or have negative equity on your existing loan.
• Your current lender charges costly prepayment penalties.
• You have plans to apply for a mortgage sometime soon.

Alternatives to Auto Refinance Loans

If you determine that an auto refinance isn’t a good fit for your situation, you may want to consider these alternative options to improve your finances:

• Vehicle trade-in: A trade-in is when a dealer makes an offer on your car and applies the credit to another vehicle. If you trade in your car, you may enjoy a newer model and potentially secure a lower interest rate.
• Personal loan: With a personal loan, you receive a lump sum of money upfront and repay it over time via fixed monthly payments. You may use the funds to cover virtually any expense.
• Debt consolidation: If you have a lot of high-interest debt, debt consolidation may streamline the payoff process and save you some money on interest. It’s when you roll multiple debts into a single account with one payoff date and ideally, a lower interest rate.
• Home equity loans or HELOCs: A home equity loan or HELOC can allow you to leverage the equity you’ve built in your home. While it may provide you with a significant amount of cash to fund a home improvement, pay for a wedding or cover any other expense, the lender can foreclose your home if you can’t make your payments.