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How Does Refinancing a Car Work?

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 1, 2024​

5 min. read​

Auto refinancing can help you get a lower payment or interest rate or reduce your loan term. It’s a simple process that shouldn’t take much of your time if you take the proper steps to get a new loan. In this guide, you’ll learn more about how car refinancing works, key benefits and drawbacks, and how to apply for a new loan.

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What Is Car Refinancing?

In a nutshell, car refinancing involves swapping out your current auto loan for a new one. Once you’re approved and the transaction is finalized, the new lender will pay off the old lender, and you’ll commence repayment on the new loan until it’s paid in full. Of course, this means you will end up with a different interest rate, payment cycle, and terms. Some people use refinancing to minimize their monthly expenses or get out of debt sooner.

Steps To Refinance Your Car Loan

Refinancing your car loan doesn’t have to be challenging. Take these steps to simplify the process from start to finish:

Weigh the Pros and Cons Of Auto Refinancing

For starters, you should evaluate the benefits and drawbacks of refinancing your car loan to determine if it makes sense financially. Auto refinancing is an investment — both with your time and money. Therefore, you will have to compare options and pay fees during the loan application process. Here are some key pros and cons to keep in mind:


  • You could get a more affordable monthly payment. Lower payment can help with budgeting, especially for consumers having difficulty keeping up with bills.
  • You could get a lower interest rate and possibly pay less interest over the loan term. This approach works best for lengthier loans. You have to consider how fees will impact your profits before refinancing your auto loan.
  • You could pay your auto loan off sooner. This strategy increases your monthly payments, but some people prefer to become debt-free sooner.
  • You could pull equity out of your vehicle. Borrowers can use the equity to cover emergency expenses and other costs.


  • You could pay more in interest in the future. This happens if a borrower extends the loan’s duration or gets stuck with a higher rate. If you go from a fixed rate to a variable rate loan, you may end up with a higher interest rate in the future.
  • You may owe more than your car is worth for some time. Some lenders and dealerships require you to pay gap insurance under this scenario.
  • You could spend a fortune if your current lender assesses prepayment penalties. Not every borrower gets a smooth transition from one lender to another.

Assuming there are more pros than cons, auto refinancing could work for you. It may be a good idea to swap out your existing loan for a new one under the following circumstances:

  • You have a new vehicle with a lower mileage
  • Your current lender doesn’t charge a prepayment penalty
  • You’re not upside-down on the loan.

A steady source of income and a solid credit score will also help. Those two factors will help you get better loan terms and save you money if they are in good condition. A steady income stream also makes it easier to keep up with loan payments and avoid more trouble. A refinance can help, but continuously refinancing the same loan without any intent to pay it off can result in excessive fees and more interest payments.

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Check Your Credit

If you decide to refinance your car loan, the next step is to check your credit, as it plays a significant role in whether you’ll get approved. You’ll likely qualify for a new auto loan with competitive terms if your credit score is good or excellent. But if it’s too low, you could have trouble qualifying for auto refinancing or only be offered loans with higher interest rates.

It’s a good idea to improve your credit score before applying for a loan to get better rates. First, however, you have to know where you currently stand. A copy of your credit report lets you see what creditors see, and getting a copy is easy. You can obtain your copy from each of the three credit bureaus – Experian, TransUnion and Equifax – by visiting View the contents of each and file disputes for inaccurate or outdated information right away. Those mistakes could be hurting your credit score, and getting them addressed can immediately add points back to your score.

Get Details About Your Current Loan

When you go through a refinance, you will have to provide the new lender with information about your current loan. Lenders will request the following details about your current loan:

  • The year, make, and model of your vehicle
  • Your current mileage
  • Your vehicle identification number (VIN)
  • Your remaining loan term and outstanding balance
  • Your current interest rate
  • Your current monthly payment

You can reference the original loan contract to confirm this information. If it’s not readily available or you are not sure where the documents are, reach out to your lender to request a copy of the contract.

Gather the Necessary Documents

You will have to provide details about your current loan, but the requirements don’t stop there. Lenders also need basic documentation to verify your identity, income, and details about your car. When you complete the formal loan application, the lender will also request the following:

  • Personal identifying information, including your name, address and Social Security number
  • A copy of your most recent pay stubs (or other proof of income)
  • A copy of your driver’s license
  • A copy of your vehicle registration
  • Proof of insurance

You should gather the necessary documents and information before you apply. That way, you’ll avoid potential delays or hiccups when the lender processes your loan application. In addition, it is a good idea to store these documents in a reliable location in case you have to revisit them for another auto loan refinance.

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Compare Auto Refinance Lenders

Don’t settle for the first loan you’re offered from your bank or credit union. Instead, get quotes from other lenders – some offer quick pre-approvals with no impact on your credit score. Some lending platforms let you fill out a form to get quotes from several reputable lenders in minutes, saving you considerable time in the process.

Regardless of how you approach the application process, you should avoid reaching out to the first lender you find. Shopping around lets you find lower interest rates and better terms. This research process also gives you time to estimate how much you can afford. An auto loan refinance calculator can help you determine your new monthly payment and if a lender’s terms make sense for you.

Comparing lenders before applying has another advantage. Borrowers limit the damage to their credit scores by taking a more patient approach. If you apply right away without shopping around first, you’ll get a hard inquiry on your credit report that could ding your credit score. You can’t take back your loan application and get the hard credit inquiry removed from your report if you end up finding another auto loan with better terms. The upside is the FICO-scoring model counts several hard inquiries within a certain period as one if you are shopping around for the best auto loan terms.

Apply For Financing

Once you’re ready to apply for auto loan refinancing, complete the loan application in its entirety. The lender will perform a hard credit check, review your loan application and make a lending decision.

You can also use an online lending marketplace if you want a streamlined financing experience. These platforms leverage technology to reach more lenders, provide buyers with more choices, and enable an easy, stress-free application process.

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Auto Refinancing FAQs

Below are some frequently asked questions regarding auto refinancing.

How long does auto refinance take?

In most instances, auto refinancing doesn’t take long. You’ll generally get a quick decision and can complete the transaction within a day or two.

Can you get cash out of your car equity?

Yes, some lenders allow you to convert a portion of your car’s equity into cash. To illustrate, if your vehicle is worth $25,000, you may have the option to refinance into a $30,000 car loan and pull out $5,000 in cash.

Will it hurt your credit to shop around for rates?

Not necessarily. Most credit scoring models allow rate shopping, which combines several hard inquiries made for auto loans within a few weeks into a single inquiry that only counts against you once.

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