How to Refinance a Car Loan: A 6-Step Guide

What is auto refinance?

Refinancing your car loan is very similar to refinancing your mortgage, but the underlying asset is your vehicle instead of your home.

When you refinance, a lender evaluates your credit history, your current loan terms and your vehicle, and determines if they can offer a better rate or loan terms than your current lender. If they can, they will pay off your current loan and assume the rest of the balance.

Should you consider refinancing your car loan?

Auto refinance allows potentially you to lower your current interest rate, pay off the loan more quickly, and/or decrease your monthly payments.

You could be a good candidate for auto refinancing if you:

• Pay relatively high interest on your auto loan
• Have a recent track record of making on-time payments
• Want to extend the term of your loan to lower your monthly payment

Auto refinance can help you:

• Lower the interest rate on your current auto loan
• Decrease your monthly car loan payment
• Reduce total interest you pay over the life of the loan
• Change parties listed on the loan (add someone, drop ex-spouse, etc.)
• Potentially delay your next car payment (if the lender allows it)

Step 1. Assess your current auto loan situation

Refinancing may not be the best financial decision for everyone. Assess your current auto loan situation to determine if refinancing your car loan makes sense for you.

To start, understand your current loan terms well so that you can easily compare them with other refinance offers. Here are some loan details to keep in mind:

Current monthly payments

If your car payments are stretching your budget and you’re struggling to make payments on time, you may want to consider a refinance. A lower monthly payment could be achieved with a lower interest rate and/or longer term.

Interest rate (APR)

Is the interest rate on your current auto loan too high? You may be able to qualify for an auto loan with a lower interest rate than your current one. With a lower interest rate, you may be able to pay less money overall during the term of your loan.

Age, type and value of the car

Consider the type of car, its age and value before you refinance. According to Car and Driver, here are some of the requirements that lenders prefer:

• Age and mileage: Most lenders prefer more recent vehicles; few will offer an auto refinance loan if your model year is more than 10 years old and/or has over 100,000 miles.
• Type: Many vehicle types are eligible for auto refinance but check with your lender to see if your vehicle qualifies. You may have difficulty refinancing a vehicle used for commercial purposes or one with significant customization. The title must be current, and the vehicle must have no major defects, such as a salvaged or flooded title.
• Value: Assess the loan-to-value ratio (LTV) of your car, which is how much you owe on your car minus its overall value. The higher your LTV, the riskier you are to lenders. Lenders may have specific LTV limits and a loan that exceeds the vehicle’s value may not be approved.

To find out the estimate of your car’s market value, enter your car details into sites like Consumer Reports or Kelley Blue Book.

Step 2. Check credit score and history

Before you apply to refinance your car loan, it’s important to know where your credit stands. Your credit score helps lenders decide if they’ll approve your loan and what interest rate they’ll offer you.

Here are some things to do:

Get your credit reports

Review your credit report for inaccuracies.Check for things like incorrect personal information, accounts that don’t belong to you, closed accounts listed as open, late payments that were actually paid on time, and anything else that appears to be in error. If any of these details are incorrect on your credit report, you can dispute them. That way, you can have an accurate report that helps you get better terms during the application process. You can get a free credit report at TransUnion or at annualcreditreport.com.

Other actions to consider

If your score isn’t where you want it to be then you can take some steps to work on it.

• Pay all your bills on time
• Pay down credit card balances
• Avoid opening new credit accounts
• Keep old accounts opento build credit history

Step 3. Understand what’s used to evaluate auto refinance loans

While every auto refinance lender will evaluate your application differently, below are general aspects of credit that lenders might use to evaluate the quality of an application:

• Recent car payment history: Are you current on your existing auto loan? Are you current on your bills in general?
• Evidence of financial hardship: Have you recently declared bankruptcy? Do you have multiple accounts in collections?
• Debt-to-income (DTI) ratio: What percentage of your monthly income goes to debt payments (mortgage, cars, credit cards and other debts)? The lower the DTI, the better. The exact requirements will vary from lender to lender.
• Payment-to-income (PTI) ratio: What percentage of your monthly income goes to your car payment? Some lenders have maximum PTI limits of 15% to 20%.
• Length of established credit history: Do you have a history of obtaining credit? Do you have multiple credit accounts (often referred to as “trade lines”)? Usually, the longer you have had accounts, the more time a lender can evaluate your credit history to gauge risk.

Step 4. Shop around and compare auto refinance lenders

When refinancing a car, you want to find the most competitive rate and term options available. To do this, it is important to rate shop and evaluate the auto loan refinance offers from several lenders, like banks, credit unions and online lenders.

As you’re rate shopping, compare factors like:

• Interest rates
• Loan terms
• Fees

Some lenders may also offer prequalification, which can provide a better idea of your new car loan term before you go through the application process. Prequalification usually entails a soft inquiry credit check, which will show on your credit report but won’t affect your credit score and is only visible to you. Prequalification is not a guaranteed approval and still requires you to formally apply if that’s the one you want to choose.

Fees or prepayment penalties

You’ll also want to consider the fees involved with refinancing. Lenders will usually explain their fees (if any). Some lenders may charge fees just to start a new loan. Others might charge you a prepayment fee if you pay off your current loan early. These costs can add up and might make refinancing less attractive, even if the new loan has a lower interest rate.

Do your homework. Before deciding, make sure to ask the lender about all the fees and read the fine print. If the savings from refinancing are bigger than the costs, it still might be a good idea to proceed. Be wary of lenders that charge substantial transaction or processing fees to refinance your auto loan — reputable lenders typically avoid this practice.

Step 5. Gather necessary documents

After you’ve chosen the loan that fits your financial needs the best, you’re ready to begin the application process. To do this, gather the required documents⁴:

• Proof of residency: Lenders usually like to see proof of residence, especially when it’s different from what’s on your driver’s license or credit report. Documents like your utility bills, bank statements and lease agreements will help prove your residency.
• Proof of income: These documents can include pay stubs from your employer, tax returns and/or 1099 forms. Lenders want to verify you have consistent, reliable money coming in to be able to repay your car loan. A lender may publish their minimum income requirements on their application.
• Evidence of auto insurance: Lenders will likely ask you to provide your insurance cards or recent monthly statement to show that you’re currently insured.
• Car information & market value: This helps show lenders that your car is qualified for refinancing and includes documents that show the vehicle identification number (VIN), make and model, year and current mileage.
• Title and payoff amount: A clean title, meaning that the title does not have a lien, that’s in your name is required, as well as the payoff amount of your current loan.

These documents may vary, so check with your lender before applying.

Step 6. Apply for and finalize a new auto loan

After making sure you have the required documents, apply for the loan of your choice either online or in person (if applicable). During this process, the lender will undergo an underwriting process to determine if you qualify and what terms to grant you.

Each lender will have a slightly different process, but you can generally expect the following process:

1. Application: You complete an auto loan refinance application
2. Decision: The lender will inform you if you have been approved. This can happen immediately or take up to a day. Most approvals are “preliminary,” meaning that they are subject to meeting all terms and conditions of their auto loan refinance requirements.
3. Loan Selection: You will work with the lender to finalize the loan terms (interest rate, term, principal balance, etc.). The lender will likely ask for more information than you provided on the application. After receiving this information, the lender will create auto loan refinancing documents for you.
4. Sign Documents: You will receive auto loan documents. Sign them, provide any required documents or notarizations and return them.
5. Auto Loan Processing: The lender will process the car loan documents, pay off your existing auto loan to your current lender, and inform you that you have a new auto loan.
6. Car Loan Payments: Your new loan begins, and you will likely receive a welcome packet and payment information from your new lender.

Pros and cons of refinancing your car loan

Refinancing a car loan can offer several benefits, but it also comes with potential drawbacks.

On the positive side, refinancing may help you secure a lower interest rate, which can reduce the total cost of your loan. It can also lower your monthly payments if you choose a longer loan term, or help you pay off your loan faster with a shorter-term loan. Additionally, refinancing gives you the option to update who is listed on the loan — for example, removing a co-signer or an ex-spouse.

However, there are some downsides to consider. Applying for a refinance usually involves a hard credit check, which can temporarily lower your credit score. You might also face fees, such as application or prepayment penalties. If you extend your loan term, you could end up paying more in interest over time. And if your credit score or financial situation has worsened since you got your original loan, qualifying for a good refinance deal might be more difficult.