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Refinancing a car loan is a common way to lower your monthly payment or total loan costs. It replaces your current car loan with a new one that has a different interest rate or terms.
But how do you refinance a car loan? If you’ve never done it before, it can help to see a breakdown of how the process works and what to expect. Follow the steps below to refinance an auto loan to work better for your situation.
Before you start the process, you’ll need to know where you stand. Grab your loan documents and review the following information:
When shopping for a new loan, you’ll need to know how much you want to borrow. This would be the balance remaining on your loan. But since you need to account for interest accrual, you’ll want to ask the bank for a loan payoff amount.
Whether you’re refinancing an older car or a newer one, lenders will want to know the year, mileage, and value. Older cars typically have a lower value than newer ones. Since lenders want to make sure they’re not lending more than the car is worth, they’ll calculate the loan-to-value ratio before approving a loan.
Whenever you borrow money, credit bureaus track how responsible you are about paying it back. A good credit score shows that you repay your debts on time and manage credit well. That’s important because your credit score, payment history, income, and monthly debts all influence your refinance options. Strong credit often leads to lower interest rates, which could help if you want lower monthly car payments.
“But how can I refinance my car if I don’t have good credit?” Plenty of people worry their credit isn’t good enough to refinance, but borrowers with growing or rebuilding credit still have opportunities. Keep making your payments on time and your score should continue to improve.
Now that you have a handle on your loan details and financial profile, you can better gauge how you might benefit from a refinance.
Refinancing probably makes sense if:
On the other hand, it may not make sense to refinance if:
Shopping around is an important step in learning how to refinance an auto loan. If you want to get the best possible rate and terms during the auto refinancing process, get quotes from multiple lenders. Once you’ve collected multiple quotes, compare these details:
Lenders will want to see proof of your identity, your income, and your debt. They’ll also want to know details about your car and your current loan. Gather up these documents to submit to your lender:
At this point, you have the information and paperwork you need for a formal loan application. Many banks, lenders, and credit unions let you apply online or, if you prefer, in person. Fill out the application and submit the documents required.
The lender will review your application, verify your information, and check your credit report to see whether you qualify and what terms to give you. Once they approve you, the lender will finalize the loan documents and send them to you to sign. They’ll process your new loan, sending the funds to your old lender to close out your old loan. Then, all you have to do is make payments to your new lender.
Now that you know how to refinance your car, you can begin the process of reviewing your current loan, finding a lender, and applying for a new loan.
Understanding the process of how to refinance a car loan and the pros and cons is going to help you make your decision and narrow down your options. Remember that sometimes refinancing may not be the best path forward, so run check your loan details and run the numbers to be sure.
Once you decide to move forward, shop around for multiple quotes before you commit to a refinance loan. Compare the details of each loan offer, especially the APR and term length, to find the one that fits you best.
RefiJet specializes in helping car owners make smart choices about their loans. Check out our tools, including our refinance savings calculator, to help you save money and make the refinancing process easier.
Below are some of the most frequently asked questions about how to refinance a car loan.
First, make sure you know the details of your current loan and gather up documents like bank statements, loan statements, your driver’s license, and your insurance card. Request quotes from multiple lenders. Once you’ve chosen a lender, fill out a formal application, upload your documents, and wait for approval.
It depends on the details of your old loan compared to your new loan, but changing the interest rate or loan terms can save hundreds or even thousands of dollars across the life of your car loan.
Essentially, you should refinance your car if the benefits outweigh the drawbacks. Pull out your calculator and a few refinance quotes to compare whether you can save money, lower your monthly payment, or cut down on interest by refinancing instead of keeping your current loan.
Although you’re most likely to get the best rates and terms with excellent credit, you can still refinance with a lower credit score. Since there’s no standard minimum credit score required for refinancing, your best bet is to shop for lenders who will work with your credit.
It’s important to note that applying for a refinance loan could temporarily drop your score by a few points when you apply. Lenders do a hard credit check when reviewing your application, and this inquiry could affect your credit score. However, the drop is usually small and recovers with time.
Find out how to refinance a car loan, from checking your credit to signing new paperwork. Learn when it makes sense and how to avoid common mistakes.
