How to Refinance a Car Loan in 6 Steps

Key takeawaysAuto refinancing replaces your existing loan with a new one.The new loan might have a lower interest rate or longer repayment term.Compare your existing loan with other options and calculate potential costs to determine whether refinancing makes sense.Auto refinancing involves using a new loan to pay off your old debt. It can result in benefits such as lower interest rates or smaller monthly payments. You also might be eligible for a cash-out refinance loan if your car’s value exceeds what you owe. However, there might be additional costs, including origination fees, so run the numbers.Understanding the auto loan refinancing process can help you make better decisions as you work toward your financial goals.What is auto loan refinancing?Auto loan refinancing is the process of getting a new car loan and using it to pay off your old debt. Just like your original loan, your new loan is secured by your vehicle. You can choose a different repayment term when you refinance. For example, if you have three years left on a five-year auto loan, you might refinance to a new five-year loan. You restart the clock on your debt and pay it off for a longer time. However, since you made payments on your old loan for two years, you refinance a smaller amount to a longer repayment term, reducing your monthly payment.Another scenario involves reducing your loan’s interest rate. If you have three years remaining on your five-year auto loan and you qualify for a lower rate, you might refinance the remaining amount for three years. Paying a lower rate and not extending your repayment term can save you hundreds of dollars in interest.When you refinance, the lender pays off your original car loan or sends you the funds to do so. You make payments to the new lender. Paying on time is important because an auto refinance loan is usually secured by your car, which the lender can repossess if you default.When is the right time to refinance your car loan?When to refinance a car loan depends on your financial situation and goals. Consider refinancing your auto loan if:Your credit has improved, and you might qualify for a lower rate.Interest rates have fallen, and you can refinance to a lower one.You face a budget crunch, and a longer repayment term might reduce your payments.An emergency arises, and a cash-out refinance can provide the money you need.In some cases, such as refinancing to a lower interest rate, you might save money. In others, refinancing can cost more in the long run but ease cash-flow issues. Refinancing your car loan might not make sense if you have other ways to deal with an emergency or manage your cash flow. Evaluate your finances and consider other options before proceeding.More: When Should You Refinance Your Car Loan? And When to Hold Off“Do your homework on your finances and your car before starting the journey,” says Patrick Olsen, editor in chief at Carfax. If an auto loan refinance makes sense, follow these steps.1. Review your current car loanAssess your existing auto loan to get a clear picture of your situation. Consider:Monthly paymentAnnual percentage rate (APR)Remaining repayment termPayoff amountYou should know:A loan payoff amount isn’t always the same as a loan balance. Your payoff amount includes interest accruing between statement dates, so it’s often higher than your balance. When you ask your lender for a payoff amount, it usually provides a number based on a specific date.You might find the payment details by logging in to your online account or reviewing your most recent statement. If you can’t find the information, call your lender’s customer service department.Understanding the terms of your current auto loan can help you decide if refinancing is the right choice.Estimate your savings with an auto refinance loanGet an idea of how much you can save by running the numbers on a new loan. Try different scenarios with loan rates and repayment terms to see if refinancing could improve your monthly budget.Enter your loan information2. Find out how much your car is worthWhen you refinance, the lender considers how much your car is worth. Many vehicles depreciate quickly, so your loan balance might exceed your car’s market value. This is sometimes known as having negative equity or being upside down. "Imagine this scenario: Your car slips on ice and crashes into a wall, and it’s totaled. The insurance will give you the value of the vehicle, but if you’re upside down, that amount could be less—even thousands less—than what you owe. This leaves you in a position where you have to make payments on a car you don’t own or drive anymore,” Olsen explains.Some lenders specialize in refinancing negative equity, but you might receive a higher interest rate. If you want to refinance an upside-down auto loan, consider making extra principal payments until you’re no longer in a negative equity position.Even without being upside down, you might not qualify for the full amount a lender offers if your car isn’t worth that much.A cash-out refinance involves borrowing more than you owe, but less than your car is worth, and receiving the difference in cash. For example, if your car is worth $16,000 and you owe $12,000, you might qualify for a cash-out refinance. You might get an auto refinance loan for $15,000. You pay off the $12,000 balance and pocket the remaining $3,000.3. Check your creditThe terms you receive on an auto refinance loan depend largely on your credit history and score. Checking your credit report doesn’t hurt your score and provides insight into what you can expect.If you have good credit, you’re more likely to get a lower interest rate. You also might qualify for a cash-out refinance or be able to refinance an upside-down loan.You might pay a higher interest rate if you have fair or poor credit. This means the loan can cost more over time, especially if you refinance to a longer repayment term. By checking your credit, you can see if you need to correct errors or take steps to improve your score before moving forward with auto loan refinancing.4. Gather documentationThe refinancing process requires the kind of documentation any auto loan does. If you gather this information before applying, you can streamline the process, increase the chances of a quick approval and receive your funds faster. Items you typically need include:Identifying information (Social Security number, driver’s license number, birth date, address, phone number and email address)Pay stubs or other proof of incomeYour vehicle identification numberVehicle registration informationProof of car insuranceLoan payoff statement from your current lenderHave these documents readily available so you can use them while shopping around for lenders.Related: What Are the Requirements for Refinancing Your Car? 5. Compare lenders for the best car refinance ratesChoose three to five lenders and compare their rates and terms. Look for those that provide quotes using prequalification without a credit check. Your prequalification quote provides an estimated loan amount, rate and term. You can use this information to compare options and choose the best auto refinance loan. Determine which loan will help you reach your goals. If you want to pay less in interest, refinancing to a lower rate and shorter repayment term might save you hundreds of dollars. On the other hand, if you need breathing room in your budget, you can refinance to a longer repayment term for a lower payment, even if it means additional interest costs.Related: How to Get Preapproved for a Car Loan6. Complete your loan applicationOnce you choose a lender, complete the application. Your final loan amount and interest rate might differ from your quote, but if you provided accurate information, they shouldn’t vary drastically. You can fill out a loan application with more than one lender, but remember that each uses a hard inquiry. However, all inquiries made for the same loan type within a 14-day period are considered one inquiry for credit score purposes, so if you complete applications with multiple lenders, try to do so within a short time frame.Decide whether you agree to the terms if approved. Then, sign the paperwork and confirm the process for paying off your old car loan. Verify that your original loan is paid off and begin sending payments to your new lender.Keep in mind:If you aren’t sure you can qualify for the best auto refinance rates, consider finding a cosigner. A cosigner with good credit can help you refinance your car loan, but they agree to take on the debt if you don’t make payments.Related: How to Get a Car LoanFactors to consider before refinancingBefore refinancing a car loan, ensure it’s the best decision for your situation. Some factors to consider include:Interest rate: Are you eligible for the best auto refinance rate? Is it lower than what you pay now? You’re likely to get better results if you can refinance to a lower rate.Car value vs. how much you owe: If you owe more on your car than its market value, refinancing can be difficult. You might find a lender willing to work with you, but you often receive a higher interest rate. Consider whether it’s worth the cost. On the other hand, if your car is worth more than you owe, you might qualify for a cash-out refinance. Even if you qualify for a cash-out refinance, review the cost of increasing your total debt.Longer repayment term: Extending your repayment term usually results in paying more overall unless you get a much lower interest rate. If your rate is the same or higher, refinancing to a longer repayment term means paying more in interest. However, you might decide it’s worth the cost if you want to find a little room in your budget.How much money you might save: If your finances have improved since you bought your car, refinancing to a shorter repayment term with the same rate might make sense. Your monthly payment will be higher, but you’ll get out of debt faster and pay less interest.Consider what you can afford, why you want to refinance and if it fits your financial needs.Pros and cons of car loan refinancingProsPotentially lower interest ratePotentially lower monthly paymentMight get out of debt soonerConsInterest costs could be higherOrigination fees or other loan fees might applyCash-out refinance can result in owing more than your car’s market valueMore: Should You Refinance Your Auto Loan? Pros and ConsPros explainedPotentially lower interest rate: Refinancing to a lower rate can save you hundreds of dollars in interest if you don’t extend your repayment term.Potentially lower monthly payment: Choosing a longer repayment term can reduce your monthly payment and create room in your budget.Might get out of debt sooner: Refinancing to a shorter repayment term with the same rate might make sense if your finances have improved. Although your monthly payment will be higher, you’ll get out of debt faster and pay less interest.Cons explainedInterest costs could be higher: A longer repayment term can reduce your monthly payment but also generally increases total interest costs.Origination fees or other loan fees might apply: Ensure you don’t pay more in fees than you’ll save. Cash-out refinance can result in owing more than your car’s market value: Being upside down makes selling your car more challenging. It is also a risk if you get in an accident.Compare the best auto refinance ratesGET YOUR RATESon RefiJet's websiteFAQWhen will auto refinance rates go down?“Recent reports on inflation in the U.S. suggest that rates will not be declining anytime soon. Loan rates and inflation are not directly tied to each other, but when inflation is high, interest rates tend to stay high as well,” Olsen says.Can I refinance my car loan with bad credit?Yes, you might be able to find a lender that will work with you to refinance your car loan with bad credit. However, you could receive a higher interest rate.How soon can I refinance my car loan after purchase?In most cases, you can refinance your car loan within a few months of purchase. Read the fine print to ensure you won’t be subject to prepayment penalties. Additionally, you might need to wait at least six months to accommodate title transfers.Will refinancing my car loan affect my credit score?Refinancing your car loan can lower your credit score temporarily. Missing or late payments can negatively impact your score. However, making on-time payments on your new auto loan might improve your credit.Are there fees associated with refinancing a car loan?It depends on the lender. Some charge origination fees and other loan costs, while others don’t. When comparing auto loan refinancing quotes, ensure you understand the potential fees.Meet the writerHannah AlberstadtHannah Alberstadt is a Buy Side staff editor specializing in loans. She is passionate about crafting informative and accessible content and has experience with topics such as loans, investing, retirement and banking. Before joining Buy Side, Hannah edited for Annuity.org, RetireGuide, USA Today Blueprint, LendingTree, Student Loan Hero and other outlets. Miranda MarquitMiranda Marquit is a staff senior personal finance editor for Buy Side.