How to refinance an auto loan in 6 easy steps

Posted 23.05.2023

How to refinance an auto loan in 6 easy steps

Want to cut down on your car expenses? Switching to a new loan can help you lower your interest rate or shorten your term. So, a grasp of how to refinance your auto loan can be your key to increase your savings. We dive into the 6 simple steps to auto loan refinancing to help you decide when is the right time to refinance your car.

What is auto loan refinancing?

When you refinance, you swap your current loan with a new one. Your new car loan then pays off the old one — allowing you to continue your payments on the new loan. Depending on what you’re after, auto loan refinancing can decrease your interest rates or shorten or lengthen your term based on your situation.

One of the biggest advantages of refinancing is trimming down your monthly interest payments. By refinancing to a lower rate, you may be able to save hundreds and even thousands over the life of your loan. For example, let’s say you refinance your car loan from 6.95% to 6.79%. This helps you lower your monthly payment and save around $180 in total interest.

Refinancing can also help you adjust your loan term based on your financial situation. If you find it difficult to make your payments, you can stretch your term. So, you create a breathing room in your budget. To pay off your car sooner, you can, however, reduce the length of your loan.

What is the process of refinancing a car?

1. Review your car loan.

Checking your current car loan is the most important step before refinancing. For instance, review your annual percentage rate (APR), monthly payments, payoff amount, and overall loan cost. This, in turn, helps you have a clearer picture of your position and guides you on your next steps.

Knowing these things also helps you later on when comparing your options. Perhaps you see that your APR is higher than what others offer, find a lender that has a cheaper rate. This can then lower your interest payments.

Or you may consider adjusting your loan term if you need to shorten or prolong your monthly payments. That said, understanding your current standing clarifies your goal in refinancing your auto loan.

2. Estimate your vehicle’s value.

Aside from your loan and interest, it also pays to verify your car’s current value. This can further help you weigh and decide if refinancing suits you.Say you have a relatively new vehicle and still owe quite a sum — this means your loan is lower than the car’s value. If you find yourself in this position, you may benefit from refinancing and save some money.

What about if your car is worth less than what you owe? You’re in a tough spot called negative equity. Refinancing with negative equity can be difficult. But that said, to improve your equity, you can make timely payments and extra payments toward your principal.

3. Check your credit.

Similar to applying for an auto loan, your credit score and credit history play relevant parts in refinancing. So, finding out where your credit stands can give you an idea of your possible rates and chances.

If you’ve made on-time payments and your credit score has improved, lenders see you as less of a risk. This can then potentially qualify you for better rates, meaning you’ll have lowers car loan payments. Though if you have bad credit, you can still find lenders that offer low interest.

In case you don’t know, you can get a free copy of your credit report and check your credit score for free. Since you pull your own credit, you won’t have to worry because it won’t affect your score.

4. Prepare your documents.

To fast-track your application, you can prepare your documents in advance. Depending on your lender and application, the requirements can vary. But usually, you need your:

Driver’s license
Social Security number
Proof of residency
Proof of income, recent pay stubs, or W-2s
Vehicle registration
Proof of insurance
Vehicle identification number (VIN)
Details about your vehicle

Aside from these, new lenders may also ask for details about your existing auto loan, including:

Your interest rate
Your remaining balance
our monthly payments
The time left on your loan

5. Compare lenders and offers.

The next step is to carefully evaluate different offers from different lenders. Try to get prequalification from multiple lenders that use a soft inquiry. This way, you get a sense of your possible rates and payments without hurting your credit score.

Once you get prequalified, you can use tools like auto refinance calculators to easily compare the numbers. Pay close attention to the APRs, associated fees, and overall terms and conditions.

How much will the new loan cost? Are there extra fees and charges you need to pay? How much can you save when you refinance? Comparing these can help you gain insight into which lender is your best option.

Also, consider your goals. Are you after lower rates or adjusted terms? For example, will a lower rate outweigh the overall cost of refinancing? If not, it may not be wise to refinance your loan.

Moreover, do you want to shorten or lengthen your payment term? Usually, you can choose to shorten your term if you have some room in your budget. This can help you save on your total interest payments. On the other hand, lengthening your term can ease your finance, but it means paying more interest.

Considering all these things can guide you in making decisions.

6. Apply to refinance your loan.

After choosing a lender, you can now formally apply to refinance your car. Note though that this lowers your credit score a bit because the lender pulls a hard inquiry.

Based on your prequalification, your lender may ask for additional documents. Then, before signing your new loan agreement, thoroughly check it to ensure the terms are fine.

Afterward, make sure you follow up and stay connected with your old and new lenders. For example, will your new lender pay off your old loan, or will you get the funds to settle it? Follow up to avoid potential missed payments. Then, see to it you meet your payments on your auto refinance loan.

Bottom line

Refinancing your auto loans influences your finance and plans, so it’s important to understand how refinancing works. This can then help you shop around, weigh your options, and find the best offer for your goal and situation. In doing so, you can effectively manage your car loan and save money.

Frequently asked questions

Is it smart to refinance your auto loan?

Car loan refinancing can either hurt or improve your situation depending on where you stand. For example, if you qualify for better interest rates that can lower your car payment, refinancing may be a smart move. But if you will incur more fees or you’re vehicle is upside-down (negative equity), it may not be wise to refinance.

How much does it cost to refinance an auto loan?

This can depend on your lender and loan agreement. Some lenders charge extra fees when you refinance your current auto loan. These can include exit fees, transfer fees, and application fees. In some states, you may be required to pay title transfer fees and registration fees.

How long do you have to wait to refinance a car loan?

Technically, you can refinance your car as long as you get loan approval. Generally speaking, most lenders won’t process your application unless your vehicle title is transferred. However, in some cases, lenders require a waiting period that can span from six months or so. While you may be tempted to move forward with your auto loan refinance, make sure it’s in your best interest. For instance, refinancing may be a great idea if your credit score has improved, and you qualify for lower rates. You may also consider refinancing if you want to adjust your term.

Does refinancing your car hurt your credit?

It depends on the type of credit pull that lenders do. For example, if you apply for prequalification with a lender that uses a soft credit check, it won’t affect your credit. But if you formally apply to refinance your car, the lender conducts a hard credit check, which can slightly decrease your credit.

Can I refinance my car with bad credit?

Yes, you can still refinance your existing loan even if you have bad credit. But make sure that refinancing is the best course of action for you. To secure a new loan with bad credit, search for lenders that accept low credit scores. For instance, check with credit unions and online lenders since they tend to have flexible credit requirements.

Carla Soto

Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.