How To Refinance A Car Loan: What You Need to Know

What’s The Process Of Refinancing A Car?

How To Refinance A Car Loan: 5 Steps To Secure A Better Rate

Taking the following steps can help you increase your odds of being approved for a more competitive refinance rate.

1. Go Over Your Current Car Loan

Get your current auto loan statement or log into your account to look at what your loan terms are, including your annual percentage rate (APR), monthly payment amount, and how much you have remaining on your loan balance. Noting these features will help you to compare new loans and whether you should refinance your car. For example, if you’re able to get approved for a lower rate, car loan refinancing could make sense.

It’s also an important step to determine whether you’re trying to refinance with negative equity. As in, the value of your vehicle is much lower than the loan amount. In this case, it may not make sense to refinance, and lenders may not be as willing to work with you.

2. Check Your Credit Report

Checking your credit score will help to see where you stand and what your odds could be when trying to get approved for a car loan refinance. There are many free and low-cost options to monitor your credit score.

Whether you have a high or less-than-stellar credit score, it’s also helpful to check your credit report to get insights into what may be affecting your score. If there are any errors, taking the time to dispute them could boost your score quickly. You can also see what other credit behaviors could be negatively affecting your score so you can take the time to fix them before applying for a loan.

3. Gather The Necessary Paperwork

Getting all your documentation ready can make the refinance application process easier and speed up the process.

Information lenders will want:

• Driver’s license
• Social Security number
• Proof of car insurance
• Vehicle registration
• Details about your vehicle, like the make and model
• Proof of income (like pay stubs)

4. Evaluate Lenders And Loan Rates

Shopping around at multiple auto loan lenders ensures you can find the best rate and term for your financial situation. You can get prequalified so you can compare to know for sure if refinancing will be beneficial. Prequalification means that a lender will check your initial information and show you what you can qualify for without affecting your credit score.

Once you have a few quotes, be sure to compare each one to see which lender is the best fit. Some loan aspects to consider include the APR, repayment term and any fees.

5. Apply For Your Auto Loan Refinance With Your New Lender

Once you select the lender you want to work with, you will need to submit a full application. Getting prequalified doesn’t guarantee you a loan approval, so the lender will ask you to go through a formal application and underwriting process.

At this stage, submitting your application will result in a hard credit inquiry which could affect your credit score temporarily. The lender may also ask for additional information such as your current loan information, proof of residence and proof of income.

If your application is approved, your new lender will work with your old lender to pay off the loan. Then, you'll start making loan payments to your new lender. Before doing so, be sure to check to confirm the old loan has been paid off.

When Should You Refinance A Car?

A change in your financial situation may be time to start thinking about refinancing your car loan. Whether it’s a boost in your credit score or you’re earning a higher income, you'll still want to carefully consider the benefits and drawbacks before applying.

Here are some situations when it may or may not make sense to refinance your car.

How Soon Can You Refinance A Car Loan After Purchase?

In most cases, lenders allow you to refinance a car after waiting 60 to 90 days after you get your loan. That's not to say you should start looking at refinancing right after this time. It may make more sense to wait at least 6 months to see if you can boost your score and build up a solid payment history. That way, you can see if you have a better chance of nabbing a more competitive interest rate.

You may not want to wait too long either. If you have 2 years or less left on your car loan, you’re better off sticking with that one. The fees you may need to pay to refinance your car loan may not be worth it. It may make better sense to make extra payments on your current loan assuming your lender doesn't charge prepayment penalties. That way, if your goal is to save on interest, you can do so.

Auto Loan Refinancing FAQs

Want to learn more about auto loan refinancing? Here are some frequently asked questions to help you find out more.

Can I refinance my car loan?

Yes, it’s possible to refinance your car loan if it makes sense financially. If you’re able to qualify for and benefit from lower interest rates, are more than 2 years from paying off the loan, and your financial situation has changed, you may want to consider refinancing. Be sure to compare features of your current loan with new ones to be sure it’s worth it to make the switch.

Is refinancing a car worth it?

Refinancing a car may be worth it if it helps you improve your financial situation. For example, if you can qualify for a much lower interest rate, you’ll end up paying in less overall, even if refinancing to the same term length.

Will refinancing my car affect my credit score?

Refinancing your loan could result in a hard credit pull when you submit your full loan application, which will affect your credit score.

When can I refinance my car?

You can refinance your car after 60 to 90 days after you’ve taken out your current auto loan, depending on the lender. However, it may make sense to refinance later if you need time to improve your credit score or find loans that offer better rates and terms.

How long does it take to refinance a car?

The Bottom Line: Refinancing An Auto Loan Can Save You Money 

Refinancing your auto loan offers many financial benefits, like saving money in interest charges and lowering your monthly payments. The money you’ve freed up from higher loan payments can be put toward other financial goals, like paying down other debt, saving for an emergency fund, or for a family vacation.

It’s worth taking the time to compare all your loan options to see how it could affect your finances. Consider looking at your current budget and see how a car loan refinance could change it for the better. If not, you can still look at your budget to see ways to pay it off faster or better ways to afford the current loan until you can refinance later on.