How to Refinance a Car Loan

If your current car loan isn’t working for you, you may be looking into refinancing. There are many reasons to refinance a car loan, such as lowering your interest rate, lowering your monthly payments or changing the length of your loan term.

Whether you can refinance a car loan depends on factors like your credit history, income, the condition of the vehicle and the lender’s credit policy. This article walks through the refinancing process step by step, from reviewing your existing loan to making your first payment on the new one.

What does it mean to refinance a car loan?

Refinancing a car loan involves replacing your existing auto loan with a new loan — usually one that fits your current financial situation better. Once the old loan has been paid off, you begin making payments on the new loan.

What should you consider before refinancing a car loan?

Before diving into refinancing, it helps to understand what could affect the process.

• Potential fees: Sometimes refinancing involves fees, such as an origination fee — an upfront, one-time fee the lender charges to process your new loan. Fees increase the overall cost of the loan.
• Loan term: A longer loan term could lower your monthly payment, but it could also increase the total interest you pay. A shorter loan term could help you pay off your loan faster, but will likely raise your monthly payment. It’s important to choose a loan term that matches your needs and goals.
• Vehicle age and condition: Some lenders set limits on how old a vehicle can be or how many miles it can have in order to be eligible for refinancing.
• Your credit score: A higher credit score may help you qualify for more favorable loan terms.

How to refinance a car loan

The refinancing process may differ based on your situation, but in general, there are five basic steps.

Step 1: Review your current car loan

Before you decide if it’s the right time to refinance your auto loan, gather some information about your current loan:¹

• Your interest rate
• Your loan balance
• Your monthly payment
• How much longer you have to repay the loan
• Whether your loan has a prepayment penalty (a fee some lenders charge if you pay off your loan balance early) or any other fees

Knowing your current loan details makes it easier to judge whether refinancing makes sense for you financially.

Step 2: Prequalify to compare offers

Many lenders let you prequalify before you commit to a full application so you can get an early look at what loan offers you may be eligible for. Prequalifying typically involves a soft credit inquiry, which doesn’t affect your credit score, so it can be a helpful way to compare offers from different lenders. Just remember that a prequalification isn’t the same as getting a final offer, and it doesn’t mean that you’ll be approved for a loan.

To get started, you’ll likely need to provide basic information, such as:

• Your name, address and contact information
• Employment status and income details
• Current loan balance and monthly payment
• Your vehicle’s make, model, year and mileage
• Your Social Security Number
• Your identity documents, such as a government-issued ID

Step 3: Gather your documents and information

When you apply, the lender may ask you to provide:²

• Information about your current loan, such as the loan balance
• The vehicle identification number (VIN)
• The car’s mileage
• Proof of insurance
• Proof of residence
• Proof of income
• Your Social Security or tax ID number

The lender will review the information you’ve provided on your loan application and perform a hard credit inquiry, which will temporarily impact your credit score. If you apply with more than one lender to compare offers, it’s a good idea to do so within a short timeframe.

Step 4: Review and close your loan

Once you’ve chosen an offer and informed the lender that you’d like to move forward, carefully review the new loan agreement documents. Pay close attention to the annual percentage rate (APR), which is the yearly cost of your loan, including interest and fees. Familiarize yourself with the important details, too, such as your interest rate, monthly payment amount, repayment term and any associated fees. Make sure that everything matches your offer, and ask questions about anything you don’t expect or understand.

Once you’ve reviewed and signed the agreement, the new lender is likely going to directly pay off the original loan. From that point on, you’ll make your monthly payments to the new lender instead. However, before you stop making payments on your old loan, it’s a good idea to check with your old lender by phone or online to confirm that your loan’s been paid off. That way, you can avoid fees if there’s still a balance remaining by the payment due date.

Step 5: Begin repaying your new loan

Review your new loan terms carefully to understand when, where and how you need to make your first payment. Keep in mind that whether the loan is the original auto loan or a refinance, it’s a secured loan that uses your car as collateral. If you don’t repay the loan, the lender can repossess your vehicle to recoup their losses, so it’s important to make your payments in full and on time.

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On the road to more favorable loan terms

Refinancing a car loan involves a few steps, but knowing what to expect helps make the process feel more manageable. Take time to compare offers, review loan terms carefully and ask questions before signing a new loan agreement. Every lender is different, so doing your research puts you in a stronger position to find terms that fit your budget and support your financial goals.

Sources

1, 2 https://www.creditkarma.com/auto/i/how-to-refinance-car-loan