Want to upgrade your auto loan? Here’s what you need to refinance.
Your personal finances aren’t static, they’re fluid. Maybe your credit scores increased or you recently received a raise at work. Either way, you may have enhanced your credibility in the eyes of lenders and increased your chances of qualifying for a refinance.
Auto loan refinancing is the process of replacing your existing loan with a new (and better) one. So, if you’re in the market for a loan upgrade, you’re likely wondering, “What do I need to refinance my car?”
Don’t worry, we’ve got you covered. Before we discuss what you need to refinance your car, let’s quickly overview the benefits of refinancing.
Why Should I Refinance My Car Loan?
The primary goal when refinancing is to get a lower monthly payment by reducing your interest rate and/or receiving a longer term.
Per the RateGenius State of Auto Refinance report, borrowers who refinanced in 2021 managed to cut their rates in half, from 14% to 7% on average. That translated to almost $100 of monthly savings ($1,158 annually).
However, it’s possible to partially relieve the burden of your car payment even if you don’t qualify for a lower rate. You can also use an auto loan refinance to extend your loan term, effectively reducing your loan payments.
On top of that, if you aren’t happy with your current lender, refinancing allows you to switch to another financial institution. Maybe you’d prefer a refinance lender with a convenient online platform. Or perhaps you’d like to pivot to a credit union instead of a bank.
With these benefits in mind, let’s dive into the application process.
How To Approach Auto Loan Refinancing in 7 Steps
Thanks to the internet and online platforms, applying for a new car loan is pretty convenient these days. Let’s walk through the refinancing application process, condensed into seven steps.
1. Determine if now is a good time to refinance
Refinancing can help you save money and lower your monthly car payments. But it doesn’t always make sense to move on from your old loan. There are a few questions to answer before you continue down this path.
Has enough time passed? Most lenders want to see 6 to 12 months of payment history for your current auto loan before they’ll consider issuing another loan. If you only recently bought your car, you may want to pump the brakes on refinancing until enough time has passed.
Is it too late? If you’re almost at the end of your loan term, you may want to stick it out. Sure, refinancing could help lower your monthly payment, but it could also extend the life of the loan and keep you indebted for longer than necessary.
Do you qualify? You might not qualify for refinancing if you don’t have good credit or your financial metrics are below average. If you’re worried about qualifying, jump ahead to the section below, “How to Increase Your Odds of Qualifying for Auto Loan Refinancing.”
Much much could you save? While you won’t know for sure until you receive loan offers, it’s worth calculating how much you could save by refinancing. Perhaps your credit has improved or rates have come down since you took out your first loan. You can use an Auto Refinance Loan Calculator to estimate potential savings based on different scenarios.
2. Assess your current loan and vehicle
Your loan and vehicle play important roles in the refinance process. First, your vehicle has to qualify for refinancing — many lenders have age and mileage restrictions. For instance, if your car is more than 12 years old or has above 150,000 miles, it might not be eligible for a new loan.
Assuming you’re good there, you’ll also need to know your outstanding balance, current interest rate, and whether you’ll owe any early payment fees. These figures will help you figure out how much you could save by entering a new loan agreement.
3. Check your credit
Although it’s only one factor, you can count on lenders pulling your credit report and reviewing your credit history. As such, you should check your credit before submitting any applications. That includes comparing your scores against minimum lending requirements as well as refinancing benchmarks (we outline these a little later).
Moreover, it’s worth pursuing your credit report for any errors or inaccuracies, which could hurt your scores and chances of approval. You may be surprised to hear that 34% of credit reports contain some sort of mistake.
Fortunately, you can check your credit for free.
4. Estimate the value of your vehicle
Just like auto loans, refinance loans are secured, meaning the associated car serves as collateral. So, your vehicle’s value is important to lenders, who will determine your loan-to-value ratio when assessing your application. This metric compares your loan amount to your vehicle value, expressed as a percentage.
You can use sites like Kelley Blue Book and Edmunds to get a general idea of how much your car is worth. Then divide your remaining loan balance by this value to estimate your current LTV. While there isn’t a firm LTV to strive for, borrowers who successfully refinanced last year had an LTV of 93.1% on average.
Car (LTV) Loan-to-Value Calculator
A loan-to-value ratio over 100% means you owe more on your loan than your vehicle is worth. An LTV over 125% can make it harder, but not impossible, to qualify for a refinance loan.
If your LTV is less than 100%, your car's value is higher than what you owe on your loan. The lower your LTV, the better.
5. Calculate your monthly income and debt
When you apply for refinancing, lenders will evaluate your capacity for more debt. They do this by calculating your debt-to-income ratio (DTI), which measures your gross monthly income against your monthly debt obligations (including legally binding agreements like rent and alimony).
So, assuming you make $5,000 a month before taxes and have $2,500 of debt payments, your DTI would be 50%.
There isn’t a universal DTI that guarantees approval. Generally speaking though, you should strive for a DTI below 48%. According to Rategenius data, 9 in 10 approved refinance applicants were below this percentage between 2015 and 2019.
6. Shop around for the best rates
A recent Cox Automotive study determined that people spend roughly 13 hours on the car-buying process. In the same manner, looking for a new loan shouldn’t be rushed — upfront research can help you find a lower interest rate and save extra cash, a process known as rate shopping.
How does rate shopping impact your credit? When you apply for a loan and lenders pull your credit report, it’s considered a hard credit inquiry. This can slightly ding your scores.
That said, credit scoring models recognize that people often submit loan applications in batches. So long as you submit your applications within the specified time frame, your credit report should only register one credit inquiry.
7. Compile the necessary information for applying
Like we said, it’s pretty easy to apply for a new loan — marketplaces like RateGenius make it even easier. But to further expedite the process, it’s helpful to have some information on hand when you apply.
That includes the following loan and vehicle info:
- The name of your existing lender
- Your current monthly payment
- Your vehicle’s make and model
- Your vehicle’s current mileage
- Your vehicle identification number (VIN)
And the following personal info:
- Contact info (e.g., address, phone number, email)
- Employment status and employer name
- Residence type (e.g., rent, own) and years of residence
At this point, the prospective lenders will likely check your credit report. There are circumstances in which the application doesn’t get that far though — for instance, if a vehicle’s mileage is too high to qualify.
Once you submit, it may take anywhere from 24 to 48 hours to find out if you were approved, depending on the lender and platform you use. Assuming you’re approved, you’ll need to share additional information, which we’ll cover in the next section.
What Documents Do I Need To Refinance My Car?
You’ve been approved for refinancing (hooray!). Now, what’s next? Paperwork.
While it’s not as exciting, it’s a necessary stage in the process. But you can save time by compiling some of these documents now versus later.
- Driver’s license
- Social security number
- Vehicle registration
- Proof of insurance
- Proof of residence (e.g., utility bill, lease agreement, insurance card)
- Proof of income (e.g., pay stubs, w2)
You’ll also likely have to sign and return a number of legal documents, depending on the lender and situation. To cover all our bases though, here’s a comprehensive list of possible agreements that need execution:
- Credit Application: This document contains data you provided when applying, such as information about your vehicle (mileage, year, VIN), yourself (credit score, income) and your existing auto loan (lender, balance, term length).
- Note and Security Agreement: This is the actual loan agreement with the lender. It defines your interest rate/APR, loan term, loan amount, and any associated costs, such as the cost of GAP, state fees or taxes, etc.
- Name Affidavit: This form is used to attest that you are the same person if there are different versions of your name, such as you used your middle name on your driver’s license but not on your previous loan.
- Application for Title: This document is used to get a new title that establishes a security interest in the vehicle by the new lender. Depending on the state, it may need to be notarized.
- Odometer Statement: This is your attestation that the vehicle mileage you provided is accurate.
- GAP contract: If your lender provides GAP coverage and you elect to purchase it, you’d have to sign a GAP contract.
- VSC contract: If your lender provides a vehicle service contract and you elect to purchase it, you’d have to sign this as well.
- Risk-Based Pricing Letter/Credit Disclosure Notice: This is a notice from the lender about how they use your credit in their underwriting and approval process.
- Military Lending Act Disclosure: If you are covered by the Military Lending Act (MLA), this notice is required and will list the protections afforded under the act.
- Authorization for Payoff: This form authorizes the payoff of your previous lienholder through the proceeds of the new loan.
- Power of Attorney: If you use a third-party platform to handle the title transfer process for you, this form authorizes them to do so and handle other legal transactions specifically related to the new loan. It may need to be notarized, depending on the state.
- Vehicle bookout: This is essentially a detailed summary of a vehicle’s value, which you may have to sign.
- Agreement to provide insurance: Your attestation that you have full coverage insurance and will keep the policy open as well as continue meeting deductible requirements.
- Membership application: If your new lender is a credit union and you aren’t already a member, you’d have to fill out a membership application.
- ACH form: Assuming you set up automatic payments, you’ll have to sign a form to authorize auto drafts.
How To Increase Your Odds of Qualifying for Auto Loan Refinancing
According to FICO, 37% of Americans have credit scores below 700. So, if you don’t have the best credit or you’re already straddled with debt, don’t worry — that’s pretty normal. Good news: there are several ways to bolster your creditworthiness and receive better refinance rates.
Before we explore a few of them, here’s a composite financial profile of refinance loan applicants based on RateGenius data. You can use these averages as a benchmark to gauge your chances of qualifying.
- Credit score: 670 (2021)
- LTV: 93.1% (2021)
- DTI: 48% (2015 to 2019)
- Term: 16.7 months elapsed (2021)
- Balance: $26,005 (March 2022)
Pay down credit card debt
The purpose of a credit score is to quantify an individual’s reliability as a borrower. From a lender’s perspective, a lower score translates to higher chances of delinquent payments and, therefore, more risk. That’s why your scores impact your loan rates as well as your ability to qualify — lenders charge a premium if they take a bigger risk.
One of the biggest components of your credit scores is your credit utilization ratio. This metric compares your total outstanding balance to your total amount of credit.
For example, let’s assume you have two credit cards. The first has a total limit of $5,000 and a balance of $500, while the second has a total limit of $2,500 and a balance of $1,000. Your aggregate utilization ratio would be 20% ($1,500 balance divided by $7,500 total credit).
It’s widely recommended to keep your utilization ratio below 30%. By paying down your balance, you can improve your credit scores and potentially increase your odds of qualifying for a refinance loan.
Consider a part-time job to increase your income
While it’s easier said than done, bumping your monthly income through a part-time job or freelance work can improve your DTI and help you get a better interest rate.
Using our previous example, let’s assume your DTI is 50% based on $5,000 of income and $2,500 of debt. If you manage to earn another $500 a month, you would fall within that key 48% threshold.
Pay down your existing car loan
If you have some extra cash, you could pay down your current car loan to lower your LTV and improve your chances of qualifying. This can be particularly effective for borrowers with vehicles that have lost a lot of value.
Perhaps your car has depreciated faster than you’ve paid off your balance. In that case, you might be upside-down on your loan (i.e., an LTV above 100%).
Auto Loan Refinancing FAQs
Taking out a new loan can be a tricky experience, especially if it’s your first time. So, let’s go through a few frequently asked questions to help guide you through the process.
How much does it cost to refinance a car loan?
The primary goal of refinancing is typically to save money — but there are potential costs to consider too. There can be origination fees, taxes, title fees, and even surprise penalties.
For instance, you might incur a fee if you repay your loan ahead of schedule, otherwise known as a prepayment penalty. This cost can eat into the savings generated from refinancing, which is why it’s important to review your loan agreement beforehand.
Is there a bad time to refinance a car?
Yes, there are less-than-optimal times to refinance your car. For starters, if your loan is less than six months old, you may have a hard time refinancing. Lenders usually prefer to see at least 6 to 12 months of payment history before extending a new loan.
Along the same lines, if you’re nearing your maturity date, it might not make financial sense to refinance. Let’s assume you only have a year of payments left. At this point, it might be wiser to pay off the debt as scheduled rather than enter a new loan agreement, effectively prolonging your payments.
Lastly, if you don’t stack up well against eligibility requirements, you may not qualify. That’s why it’s prudent to check your scores and assess the competitiveness of your DTI and LTV before applying.
What is the difference between refinancing a car and leasing a car?
The biggest difference between financing and leasing a vehicle is ownership.
With a loan, you work with a lender to purchase a car. Assuming you make a down payment, both you and the lender immediately have an ownership stake in the car. As you make payments, you build equity in your vehicle. Upon full repayment, you become the vehicle’s sole owner.
On the other hand, leasing a car is like renting an apartment. It’s yours for the duration of your agreement with the lessor, so long as you make timely payments. Once your lease expires, you hand over the keys and it’s no longer your car.
What’s the difference between a cash-out refinance and a refinance?
A cash-out refinance is pretty similar to a normal refinance. However, with the former, you borrow against the positive equity you have in your car. So, upon closing, you receive a lump sum in addition to a new loan.
Let’s pretend you have a used car worth $20,000 and your loan balance is $10,000. You could apply for a $15,000 loan, which would equate to $5,000 of upfront cash.
Keep in mind though, you not only have to repay this amount but the additional debt still accrues interest. So, your total loan interest is higher.
It Never Hurts To Test the Waters of Refinancing
Whether you’re champing at the bit to get a new loan or you’re on the fence, it doesn’t hurt to test the waters. Here’s a quick rundown of the seven steps to auto loan refinancing:
- Determine if now is a good time to refinance.
- Assess your original loan and vehicle.
- Check your credit.
- Estimate the value of your vehicle.
- Calculate your monthly income and debt.
- Shop around for the most competitive rates.
- Compile the necessary information for applying.
About The Author
Carter Kilmann is a personal finance writer and editor for hire, covering topics like credit cards, mortgages, budgeting, banking, and investing. He's written for The Points Guy, Investing.com, Thrive Global, Day to Day Finance, Money Mini Blog, and more.