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How to Refinance an Auto Loan

Written by Marc Guberti

Marc Guberti is a Certified Personal Finance Counselor who has been a finance freelance writer
for five years. He has covered personal finance, investing, banking, credit cards, business
financing, and other topics.
Marc’s work has appeared in US News & World Report, USA Today, Investor Place, and other
publications. He graduated from Fordham University with a finance degree and resides in
Scarsdale, New York.
When he’s not writing, Marc enjoys spending time with the family and watching movies with
them (mostly from the 1930s and 40s). Marc is an avid runner who aims to run over 100
marathons in his lifetime.

Updated January 2, 2024​

5 min. read​

Are you thinking about refinancing your auto loan to get a lower monthly payment? It could be a sound idea, but you’ll want to ensure it’s a smart financial move.

In this guide, you’ll discover when it makes sense to refinance your car loan, how to pull it off with ease and an online platform you can use to simplify the process.

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Benefits of Refinancing Your Auto Loan

Wondering why people get auto loans refinanced? There are several benefits that entice borrowers to refinance their auto loans.

1. Access Lower Interest Rates

If your credit score was low when you applied for your current auto loan, chances are you received a steep interest rate. Most borrowers with low credit accept the higher interest rate because it’s their only path to a loan. However, each monthly payment on your current loan helped your credit score. Building a history of on-time payments allows borrowers to qualify for better interest rates and loan terms. If your credit score has since improved, you could access a lower interest rate on your new loan. Changing your original loan under these circumstances can save you hundreds or thousands over the life of the loan and possibly reduce your monthly payment.

2. Decrease Your Car Payments

A lower interest rate isn’t the only way to lower your car payment, though. You can also refinance your auto loan to stretch out the repayment period, which means the monthly payment will be lower. Of course, the downside is you’ll pay more in interest over the loan as the lender will have more time to collect from you. Still, you have the option to refinance your car loan and repay the loan early to curb interest costs if the lender doesn’t charge an early prepayment penalty.

3. Get a Shorter Term on Your Loan

You could also opt for a shorter term on your auto loan when you refinance. The monthly payment will likely be higher, but you could avoid spending a fortune on interest. Some borrowers apply for long-term loans when getting started because they aren’t sure about their ability to make higher monthly payments. Since getting the first auto loan, a borrower may get a raise or develop multiple income streams that make it easier to cover monthly payments. Car owners in this situation may prefer to make higher monthly payments and get out of debt sooner so they have more financial flexibility for future obligations.

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When Should You Refinance Your Auto Loan?

It could be sensible to refinance your auto loan in these situations:

Interest Rates on Auto Loans Are Lower

What are the current market conditions? Suppose they were fiercely competitive when you applied for an auto loan but have since cooled off. In that case, the average interest rates across the industry could be lower. A lower interest rate can save you a lot of money over the life of your loan.

You’re Paying Too Much Monthly

Does your monthly auto loan payment seem unaffordable? Although you can get a fixed-rate loan and make consistent monthly payments, other expenses in your life can increase. Higher costs in other areas can suddenly make fixed monthly payments more challenging. You may have a reasonable rate, considering your credit score and overall financial health. But refinancing to get an extended loan term could help reduce your monthly car payment and free up funds in your budget. Some people forgo good terms on a current loan to secure lower monthly payments on a new auto loan.

You Want to Get Out of Debt

Refinancing a car loan isn’t just about securing a lower monthly payment. Some car owners want to escape debt as quickly as possible and avoid paying more interest over the life of the loan. Refinancing your loan to trim off a few years will increase monthly payments, but you will save money in the long run. Not everyone can initially qualify for a shorter-term loan since that requires a more favorable debt-to-income ratio. However, people’s financial situations change, and you may qualify for a refinance that gets you out of debt sooner. Getting rid of your auto loan sooner will also help your debt-to-income ratio if you decide to apply for a mortgage or another financial product in the future.

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You Have a Better Credit Score

The best interest rates are usually reserved for borrowers with good or excellent credit. Even if you don’t have perfect credit, you could get a lower interest rate if it’s far better than it was when you initially applied for your current auto loan. You can check your credit report before applying to see your score, look for errors that you can then report, and look at which financial activity has a more substantial impact on your credit. The three major credit bureaus — Experian, Equifax, and TransUnion — can each provide you with a free copy of your credit report every year. Asking one of the major credit bureaus for a copy of your credit report will not impact your credit score.

How to Refinance an Auto Loan in 5 Steps

When you’re ready to move forward, below is a step-by-step guide to refinancing your auto loan with ease:

1. Determine if Auto Refinance Is Right for You

First, run the numbers to gauge if refinancing your auto loan makes sense. Does it make sense for you to lower your monthly payment in exchange for having to deal with more of them? Can you secure a lower interest rate if you get your auto loan refinanced? Then, consider the fees associated with refinance transactions. Also, ask the lender if there are any origination fees or prepayment penalties. These expenses can cancel out the profits from securing a lower interest rate. If you have a low loan amount on your remaining balance, it may make more sense to stick it out.

2. Find Lenders Offering Auto Refinance Loans

Refinance loans are offered by traditional banks, credit unions and online lenders. There’s no shortage of lenders to choose from in these categories. So consider using a platform that presents you with the best offers for your financial situation. That way, you won’t get stuck with lenders who expect higher credit scores, and you will find competitive interest rates and terms relative to your financials. More on that shortly.

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3. Review Lenders’ Requirements

Ask the lenders you’re considering about their loan requirements. Many have a minimum credit score you’ll need to qualify. Some also have restrictions on the age and mileage of vehicles they’ll consider for refinancing. Generally, your car should be less than eight years old and have fewer than 100,000 miles. Eclipsing any of these marks can make it more difficult to get a refinance, and you may also have to contend with a higher interest rate.

Visit each lender’s website and use the pre-qualification tool (if available) to gauge your approval odds and view potential loan terms. This will help you determine which lender to apply with, and it does not impact your credit score. You only get a hard credit inquiry if you apply for a loan offer that you receive during the preapproval process.

4. Prepare Documentation for the Application

Not all lenders require the same documentation. However, these documents are usually required across the board:

  • Copy of your driver’s license and vehicle registration
  • Proof of auto insurance
  • Your last two pay stubs (or other proof of income)
  • A 10-day payoff statement from your auto lender
  • Current mileage on your vehicle
  • The vehicle identification number (VIN)

Also, expect to provide your name, address, phone number and Social Security number. Some lenders will also request your previous address, whether you currently rent or own, and the amount of your current monthly housing payment.

5. Apply with a Lender to Get Approved

Once you’ve gathered the necessary documents, submit a formal application with your top choice. Be sure to review the forms before submitting them. You should reach out to the lender if questions arise to avoid an accidental rejection and speed up the loan application process.

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