How To Refinance a Car Loan

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If you’re one of many Americans wanting to refinance your car, we’ll walk you through the steps.

Refinancing your car includes several steps: shopping around, gathering the necessary documents, pre-qualifying, submitting an application, and finalizing the loan. If you’re one of the many people struggling to keep up with their car payments, or you’re simply looking for a way to save money, you might be interested in refinancing your car.

In a recent report, RateGenius found that almost 20% of borrowers who refinanced their car loan saved more than $150 on their monthly payments. And on average, each borrower reduced their auto loan interest rate by half (from 14% to 7%). That’s some pretty big savings!

Read on to learn more about how to refinance a car and whether it’s the right move for you.

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How Does a Car Refinance Work?

In a nutshell, refinancing a car simply means taking out a new loan with better terms to pay off your existing loan. By refinancing, you can often get a lower interest rate, a lower monthly payment, and even a shorter loan term that could help you get out of debt sooner.

Though auto refinancing has many upsides, whether it’s the right decision for you will ultimately depend on your circumstances. So before taking the plunge and signing on the dotted line, make sure you understand what refinancing a car loan entails.

How To Know if You Should Refinance Your Car

If your high car payment gives you anxiety or eats up a chunk of your monthly budget, you might want to consider refinancing. But how do you know if it’s the right move for you? Here are a few things to keep in mind:

How is your financial situation?

Typically, the higher your credit score, the more willing lenders are to offer you a lower rate. If you’ve been working diligently to achieve a good credit score, refinancing your vehicle could save you hundreds and thousands of dollars over the life of the loan due to a more affordable interest rate.

But, if your credit score hasn’t budged since you took out the original car loan, refinancing your vehicle might not result in much savings. Unless, of course, interest rates have dropped due to economic conditions or other factors.

If you’re unsure where you stand in terms of your credit health, get a copy of your credit report at annualcreditreport.com. Under the Fair Credit Reporting Act, you’re entitled to one free credit report annually from each of the three major credit bureaus. If you find errors on your credit report that are damaging your credit score, dispute them right away!

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Are there prepayment penalties on your current loan? Or other fees?

A prepayment penalty is a fee — typically around 2% of the outstanding loan amount — that your lender might charge you if you pay off your car loan early. You might be thinking, “shouldn’t they reward me for paying off my debt in full and on-time? Why are they punishing me with a hefty charge instead?”

Here’s the simple answer: Lenders can’t collect as much interest when you pay off your loan ahead of schedule. For this reason, many lenders impose prepayment penalties to compensate for the interest revenue they lose out on.

Apart from the prepayment penalty, there might also be other costs associated with auto loan refinancings, such as title transfer fees and application fees. So make sure you’re financially ready to cover these expenses before refinancing your vehicle.

How much time left do you have on your current loan?

If you only have a few months remaining on your car loan, it might not be worth the hassle of refinancing — especially if your lender charges a prepayment penalty. On the other hand, if you still have several years left to pay, refinancing could save you a significant chunk of change in interest charges over the life of the loan.

If you still aren’t sure whether it makes more financial sense to refinance or keep your current loan, use Rategenius’s auto refinance calculator to see how much money refinancing can save you.

Are you upside down on your car loan?

Being upside down on your car loan means you owe more on your current loan than the car is worth. In other words, you have negative equity in your vehicle.

If you’re upside down, refinancing might not be the best option for you. And you might want to wait until you’ve paid down enough of the loan principal so that the remaining loan balance equals the car’s value. Otherwise, lenders might be reluctant to take you on because of your high risk.

And though some lenders might allow you to roll your current outstanding loan balance into your new one, it adds to your overall debt and can worsen your financial situation.

What’s the condition of your car?

Wine, blue jeans, whiskey, and leather boots all get better with age. But it’s hard to say the same for cars. Vehicles are depreciating assets that tend to wear down after a few years — no matter how diligently you keep up with maintenance and repairs.

Of course, there are some exceptions. With the advent of modern technology and engineering, car models like Toyota Landcruiser SUVs can often reach 200,000 miles or more without breaking down.

But generally speaking, most auto lenders still limit vehicle age to 10 years and mileage to 100,000 or 150,000 on refinances. So, if you’re looking to refinance your 1997 Audi A4 Sedan that has racked up more than 150,000 miles, you might have difficulty finding a willing lender.

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How To Refinance Your Car

If this is your first time refinancing your vehicle, it can be overwhelming trying to figure out the steps to take. But don’t worry, it’s not too complicated! Once you’ve determined that refinancing makes sense for you, here’s everything you need to know:

1. Shop around

Once you’ve decided that refinancing is the way to go, the next step is to shop around. There are many different lenders out there, and it’s essential to compare rates and terms before choosing one. Using an online auto loan marketplace like RateGenius is an excellent way to comparison-shop efficiently.

2. Gather the necessary documents

After you’ve selected a few lenders you’re interested in, it’s time to gather the necessary documents. Here are examples of documents that lenders typically ask for:

  • Social Security number
  • Employment information
  • Proof of income
  • Residence information
  • Credit and banking history
  • Driver’s license
  • Vehicle identification number
  • Car registration and mileage information
  • Proof of insurance

Your lender might have some other documents they need you to submit, but this list is a good starting point.

3. Pre-qualify

A pre-qualification gives you an estimate of what terms and auto loan rates a lender is willing to offer you based on a soft credit pull (don’t worry, this won’t affect your credit score). By getting pre-qualified, you’ll have an idea of how much your monthly payment is before submitting a formal application.

4. Submit an application

If you’re ready to commit to working with a certain lender, submit your application! This part is pretty straightforward because most lenders have streamlined the online application process.

Remember that your credit score might take a hit when you submit your application since lenders will need to do a hard credit pull. But don’t worry. According to Equifax, this negative impact will eventually subside after one year.

5. Finalize the loan

If your auto refinance application is approved, congratulations! Now it’s time to transition to making payments to your new lender. But before doing so, reach out to your previous lender to confirm that your original loan has been paid in full. If not, wait until everything is finalized before you stop making payments on your current auto loan.

What rate can I get? What rate can I get?

How Long Does It Take To Refinance Your Car?

Depending on the lender and whether you need to submit additional documents, the auto loan refinance process can take anywhere from 2 to 15 business days. To avoid unnecessary delays, turn in the requested documents on time and respond to your lender’s follow-up questions. Missing information in loan applications can drag out the process even longer, so be sure to carefully review your application before submitting it.

Refinancing the Right Way

Whether you choose to refinance with the same lender or work with a new one, make sure to do your due diligence and compare rates before making a final decision.

Taking your time to understand all of your options can help you avoid predatory car loans and get the best deal possible. And if your application is denied, don’t despair! Figure out why you were rejected and take steps toward increasing your approval odds next time.

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About The Author


Jamela Adam

Jamela Adam is a personal finance writer covering topics such as savings, mortgages, investing, student loans, and more. Her work has appeared on Clever Girl Finance, Chime, SuperMoney, and Mint Intuit, among other publications.


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