How Do You Refinance a Car Loan?

From start to finish, the auto loan refinance process may take a few days, Owens says. Here are the basic steps:

1. Review your current loan. Check your loan documents to figure out the interest you pay each month and the total cost of the loan if you finish the entire term. You’ll use these figures later to determine whether refinancing makes sense.

2. Check your credit. This can help you figure out whether you’ll be eligible for an auto loan refinance. If your credit has improved since you took out the original loan, you may qualify for a lower interest rate to help you save money. Strong credit can also help you leverage one lender’s offer against another to get a better deal.

Each of the three major credit bureaus allows you to check your credit report weekly for free through the end of 2022. Free credit scores may be available from your credit card issuer or bank, or you can try free credit score apps.

3. Gather your documents. You will need to share personal, vehicle and loan information with your lender to refinance. Personal information might include your government-issued photo ID, employer’s contact information, proof of income and Social Security number. The lender will also ask for your vehicle identification number, registration and mileage, plus your loan payoff amount and term.

4. Prequalify with several lenders. A prequalification uses a soft credit pull, which helps you shop for offers without hurting your credit. You might be able to get prequalified with your current lender along with a mix of online lenders, credit unions, and local and national banks.

Once you have a few offers in hand, compare the annual percentage rates, loan terms, monthly payments, fees, prepayment penalties and total interest you’ll pay over the life of each loan. “Compare what you’re paying today by what you could potentially pay by refinancing,” Owens says.

5. Check your budget. Go through your monthly expenses and make sure you can comfortably manage the new car payment. Loans with longer repayment terms generally come with lower monthly payments and higher interest rates, which means you’ll pay more interest overall. A shorter term comes with higher monthly payments and less interest over the life of the loan. If you’re not sure you can afford higher payments, consider taking out a loan with a longer term and paying more toward the principal when you can.

6. Apply for the loan. The lender will likely run a hard credit pull, which can temporarily lower your credit score. Also, the lender will verify your income and employment status and may separately appraise your car. Always read the contract before you sign for a loan, and ask questions if something is unclear.

7. Start payments on the new loan. You can begin to pay the new lender when the old loan is paid off. The new lender should pay off the loan balance from the previous lender once your loan is approved and you sign the paperwork. Contact the previous lender to make sure this happens correctly, and ask for a payoff document.

You may want to refinance your auto loan when it helps you financially, including when:

Your original loan doesn’t have a prepayment penalty. This means you could pay off the loan early without being charged a fee. Check your contract to verify whether the loan comes with a prepayment penalty. If you can’t find the contract, call the lender’s customer service department.

You’ll save on interest. When you refinance an auto loan with a lower interest rate, you can save on the monthly payment and the total interest. For instance, dropping the interest rate from 14% to 7% on a $15,000 car loan can save you $52 a month and $3,120 over five years. Your savings partly depends on how much interest you’ve already paid toward the original loan.

You want to remove a co-signer or co-borrower. If you signed for the original auto loan with someone else, you can remove that person from the loan by refinancing into a new one.

You want to lower your monthly payment. You can also refinance an auto loan to a longer term, which lowers your monthly payments. This can make room in your budget, although you may pay more interest over the life of the loan.

But auto loan refinances aren’t right for everyone, says Paris Chevalier, president and CEO of South Bay Credit Union. She cautions against refinancing if you owe more than your car is worth or your original loan has high prepayment penalties.

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