Refinancing a car loan can lower your interest rate and monthly payment, adjust your repayment term, and even tap some of the equity you have in your vehicle.?
Here's what you need to know about how to refinance a car loan, some of the benefits you may enjoy, things to consider before you apply, and whether or not it's a good financial move for you.
Already got the basics? See our picks for the best auto refinance loans to see if you can lower your rate and pay less money overall.
Steps to Refinance Your Car Loan
Knowing how and when to refinance a car loan is crucial. With these steps, you can gauge your eligibility and maximize your chances of getting the best offer available to you.
- Review your current car loan
- Know your car's value
- Understand your credit and finances
- Get quotes for refinancing rates
- Determine your potential savings
- Apply for a car loan refinance
1. Review Your Current Car Loan
Log in to your online account with your auto lender and gather some details about your current loan, including the following:
- Remaining balance
- Interest rate
- Remaining number of payments
- Monthly payment amount
These details make it easier for you to evaluate your current situation and determine whether you can get better terms with a refinance loan.
2. Know Your Car's Value
Depending on the lender, you may be able to get a refinance loan worth up to 180% of your car's value (based on Investopedia’s research, OpenRoad Lending offers refinance loans with loan-to-value ratios up to 180%). You can get an idea of what your car is worth by using a website like Kelley Blue Book (KBB) or J.D. Power.
Note that lenders typically use the vehicle's retail value rather than the trade-in or private-party value. With this information in hand, you can estimate how much you'll be able to borrow with a refinance loan.?
3. Understand Your Credit and Finances
Refinancing a car loan can be an excellent option if your credit, income, and other aspects of your finances have improved since you first bought the vehicle.?
Use a free credit monitoring service from a provider like Credit Sesame or Experian to check your credit score and review credit report information; this lets you gauge your odds of getting approved with better terms than what you're paying now. In general, the best auto refinance rates are reserved for borrowers with credit scores in the 700s.
You'll also want to calculate your debt-to-income ratio (DTI), which you can do by adding up your monthly debt payments and then dividing the sum by your gross monthly income. Some lenders may approve your application with a DTI of up to 50%, but having a ratio below 35% will give you a better chance of securing favorable terms.
If you’re not sure where your credit stands, take a look at the best credit monitoring services to get a better understanding of how lenders see you as a potential borrower.
4. Get Quotes for Refinancing Rates
Many auto lenders, like Capital One, allow you to get pre-qualified for a loan before you submit an official application. This process makes it possible to compare interest rate quotes, repayment terms, and monthly payments from multiple lenders with just a soft credit check, which won't impact your credit score.
Not all lenders offer pre-qualification, though, so make sure the lender notes that checking your rate won't affect your credit before you proceed. Keep in mind, too, that pre-qualification doesn't guarantee approval or a specific rate. The lender's final decision will be based on a full credit check and application.
If you do need to submit multiple applications while shopping around, don't worry about multiple inquiries hurting your credit. As long as you complete the rate-shopping period within a 14-day period—or up to 45 days with some credit scoring models—all of your inquiries will only count as one for credit scoring purposes.
Best Auto Loan Refinance Rates
|Lender||APR*||Loan Amounts||Loan Terms|
|PNC Bank||5.89%–20.84%||$5,000–$100,000||1–7 years|
|AUTOPAY||As low as 2.99%||$2,500–$100,000||2–8 years|
|Consumers Credit Union||5.24%–9.04%||$500–$350,000||5–7 years|
|PenFed Credit Union||5.19%-6.99%||$500–$150,000||3–7 years|
|OpenRoad Lending||1.99%–24.99%||$7,500–$100,000||2–6 years|
5. Determine Your Potential Savings
Once you've received some quotes, you can compare the best offer with the terms of your current loan to determine if refinancing is worth it. While auto loan refinances typically don’t come with any upfront fees, check your existing loan contract for potential prepayment penalties that could eat into your savings.
6. Apply for a Car Loan Refinance
After you narrow down your list of options to the best offer, apply directly with that lender online or over the phone. You'll share some basic information about yourself, such as your name, address, date of birth, Social Security number, and contact details.
You'll also need to provide documentation to verify your identity, state of residence, employment, and income, along with payoff details for the current loan, the car's registration and mileage, and proof of insurance coverage.?
Once you've submitted your application, you can typically close the loan within a few days, as long as you've provided everything the lender needs to make a decision. Note that some lenders will mail your check or ask you to pick it up in person, like Navy Federal, but many others have made the process completely online, like LightStream.
After approval, the lender will pay off your existing loan directly and tell you when the first payment on the new loan will be due. Continue to make payments on the original loan until you've confirmed it's been paid off, then set up automatic payments with the new lender. Some lenders, like AUTOPAY, allow cash-out refinances; if you’re approved for a cash-out refinance, the lender will disburse the cash portion of the new loan to your bank account or as a check.
Benefits of Refinancing Your Car Loan
Depending on your situation, you may be able to take advantage of one or more benefits with an auto loan refinance. Here are some potential pros to consider.
Lower Monthly Car Payment
Depending on the terms you qualify for, you may be able to get a reduced monthly payment. Even if you don't get a lower interest rate, refinancing at a longer term than what you have remaining on your current loan can cause your monthly payments to drop.
It's important to keep in mind that extending your loan term can result in higher total interest charges.
Lower Interest Rate
If your credit and other financial details have improved or market interest rates have dropped significantly, you may be able to get a lower interest rate than what you're currently paying. This can significantly decrease the total amount you pay for the loan, by hundreds or even thousands of dollars. A lower rate can also result in a lower monthly payment without higher total charges.
Shorter or Longer Loan Term
Depending on your need for payment flexibility, you can opt for a shorter or longer term than what you have left on your current loan.?
A shorter term can save you money on interest, but make sure you can afford the new monthly payment before you proceed. And while a longer term can help reduce your monthly payment amount, it can also cost you more in the long run.
Cash Out of Your Vehicle
If you have a significant amount of equity in your car, you may be able to access some of it in the form of cash. Just be aware that if your refinance loan balance is more than 100% of the vehicle's value, you'll have negative equity in the car, which could come back to bite you if the vehicle is totaled in an accident or you try to trade it in for a new car.
Factors to Consider Before Refinancing Your Car Loan
While there are some clear benefits of refinancing your car loan, you'll also want to think carefully about the following factors before you proceed.
- Time remaining on the loan: If you only have a year or two left on your loan, it may be better to stick it out instead of getting a loan with a longer repayment term.
- Refinance requirements: In addition to credit and income requirements, lenders also have minimum requirements for your loan and vehicle. As you compare lenders, check for minimum requirements for the vehicle's age and mileage, loan amount, and other eligibility criteria.
- Monthly payments: During the pre-qualification and application process, compare monthly payments with each offer to what you're paying on your existing loan. At the same time, make sure to also calculate total interest charges—just because a new loan offers a lower payment, it doesn't mean you're saving money over the life of the loan.
- Prepayment penalties: Review your loan contract for fees you may incur for paying off your existing loan early. If the lender charges one, it may be a percentage of the remaining balance or a fixed amount.
- Effects on your credit: Applying for an auto refinance loan typically involves a hard inquiry on your credit reports and a new loan account, both of which can impact your credit score. Additionally, if you're getting a cash-out refinance loan, the higher loan balance can also negatively affect your credit. Keep in mind, though, that the most important factor in your credit score is your payment history, so as long as your score is in good shape and you pay on time, the effects of refinancing won't be too harsh.
- Market rates: Even if your credit and income have improved since you took out the original loan, you still may not get a better rate if market rates have increased in the meantime. The pre-qualification process can give you an idea of whether or not rates are low enough to make refinancing worth it.
Does Refinancing a Car Loan Hurt Your Credit?
Refinancing a car loan can affect your credit, but the negative impact is usually slight and temporary in nature. There may be negative effects from the hard inquiry and new account on your credit reports, but these are relatively minor factors compared to more important things like payment history and credit utilization. Understanding the factors that affect your credit can give you a better idea of what to expect.?
Can You Refinance a Car Loan With Bad Credit?
If you're wondering how to refinance a car loan with bad credit, the process can be difficult and costly. While there are auto lenders that specialize in working with bad-credit borrowers, they tend to charge high interest rates and fees. Depending on your current loan terms, it might not be worth it.
When Should You Not Refinance Your Car Loan?
Although refinancing can benefit you financially, there are situations where it might not make sense, such as if:
- You only have a year or two left on your car loan.
- Your loan amount is too low to meet lender requirements.
- Your vehicle has too many miles or is too old to qualify.
- You can't find better terms during the pre-qualification process.
- You're planning to apply for a mortgage loan in the near future.
- You have negative equity with your current loan.
- Your current loan has expensive prepayment penalties.
Sometimes you have to explore your options before you’ll know if refinancing is a smart move. See the best auto refinance loans to see what you can get.
What Documents Are Required to Refinance a Car Loan?
Requirements can vary depending on the lender, but here are some general documents you'll want to have on hand before you start the application process:
- Driver's license
- Vehicle registration
- Proof of insurance
- Vehicle identification number
- Loan payoff statement
- Proof of employment and income (pay stubs, bank statements, or a W-2 form)
Check with your lender of choice to learn if any other documents are required.
Capital One. "It Won't Hurt to Check Your Credit for Savings."
Consumer Financial Protection Bureau. "What Effect Will Shopping for an Auto Loan Have on My Credit?"?
Navy Federal Credit Union. "Auto Loan FAQs."?
AUTOPAY. "Cash-Out Refinance."