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How Does Refinancing a Car Work?

September 24, 2021

The monthly payments and interest rate you agreed to when you first signed up for your car loan aren’t written in stone. Just as borrowers can refinance a mortgage or consolidated credit card debt, you may be able to lower your monthly car payments or save money on interest with an auto refinance. 

How does refinancing a car work? The process is surprisingly straightforward, but there are a few key things you should consider before you apply. 

What Exactly Does Refinancing a Car Mean?

Refinancing a car is when you pay off your existing car loan and replace it with a new one, usually from a different lender. While refinancing won’t lower your total loan amount, you may benefit from more favorable terms. 

For example, if your new loan has a lower interest rate, your loan will accrue less interest each month and you might save money overall. And, if the loan also has the same repayment term, the lower interest rate could make your monthly payments decrease. 

Even if you don’t qualify for a lower interest rate, you could increase the length of your loan to lower your monthly payments. This could be helpful if your finances have changed and if you need some extra wiggle room in your monthly budget. 

Alternatively, if you can afford a higher monthly payment, choosing a loan with a shorter term might help you score a lower interest rate. 

How the Refinancing Process Works

Applying for auto loan refinancing is straightforward, but it can involve a little paperwork.

Step 1: Shop for a loan.

Comparing options is an important first step in finding the best refinancing offer. Check to see if you qualify for auto loan refinancing with banks, credit unions, and online lenders. 

There may be eligibility restrictions based on:

  • Where you live
  • The vehicle’s age, value, and mileage 
  • Your current car loan balance and remaining repayment term

Step 2: Compare your loan offers.

Offers and terms can vary widely between lenders. Check with several to make sure you’re getting the best deal. Some lenders also let you see what you might qualify for with a soft inquiry, which won’t impact your credit score. 

Note, there may be fees to take out a new loan and transfer your car title. Also, check with your current loan servicer to see if they will charge a prepayment fee if you pay off the old loan early. Add up the fees, and then use an auto refinance calculator to see if refinancing works for your financial goals. 

Once you choose a lender, submit a loan application. Keep in mind, unlike checking your rate, applying is a hard credit inquiry and could cause a small, temporary dip in your credit score.

Step 3: Get your documents in order.

You’ll need to have both your personal and loan documents ready. Your new lender may use these to verify your identity, vehicle ownership, and loan eligibility.

You’ll need:

  • Driver’s license and Social Security card 
  • Vehicle registration and insurance 
  • Proof of income, such as pay stubs or tax returns
  • Original loan contract

You may also need to provide details about your car, such as:

  • Year
  • Make 
  • Model
  • Trim
  • Mileage
  • Condition 

As well as details about your loan: 

  • Current monthly payment
  • Outstanding balance
  • Number of remaining payments 

Some lenders, including LendingClub Bank, can look up the car’s details if you have the vehicle identification number (VIN) to save you time. 

Once your new loan is approved and you accept, your new lender will often pay off your old auto loan directly

Step 4: Transfer the title.

You may also need to transfer your vehicle’s title to your new lender. You can sometimes do this online, or you may need to print, sign, and mail the required documents. LendingClub Bank can complete the title transfer process for you once you sign and mail a limited power of attorney (LPOA) form. 

Step 5: Start paying off your new loan.

Once your new loan is set up, you’ll start making payments based on the terms you chose. If you have trouble remembering to pay your bill, consider enrolling in auto pay. 

Also, contact your original lender to make sure your loan was paid off. Depending on when the funds were sent and applied to the loan, you may have to make a final payment.

When Does It Make Sense Refinancing a Car?

Refinancing your car isn’t always worthwhile, but there are a few situations when it might make sense.

1. Your financial situation improves.

You may want to shop for auto loan refinancing if your income or credit score has increased since you first took out your auto loan. Or, if you’ve paid off debts and have a lower debt-to-income ratio. Either situation may help you qualify for more favorable terms on a new auto loan.

2. Market interest rates have dropped.

Even if your personal situation hasn’t improved, market competition impacts auto loan rates. When interest rates fall, lenders may offer lower rates to attract new customers. Check several lenders’ current rate ranges to see if you might benefit. 

3. You didn’t shop around for your first loan.

If you originally financed your auto loan through a dealership or didn’t shop for a loan, you may qualify for a better loan even if there haven’t been significant changes in your finances or market rates. 

4. You want to lower your monthly payment.

Sometimes, lowering your monthly payments takes priority over getting a lower rate. If you need to free up room in your budget, see if you can qualify for a loan with a longer term and lower monthly payment. 

5. You want a new lender.

Refinancing changes more than your loan’s terms—you’ll also have a new lender. While it might not be enough of a reason on its own to refinance, working with a new lender could be an added perk. 

5 Things Lenders Look for When Refinancing Your Car Loan

Different lenders may have different requirements, underwriting methods, and refinancing rates—which is why comparing is so important. In general, lenders will consider:

1. The vehicle’s age, make, model, and mileage

Lenders may refuse to refinance certain vehicle makes and models or have limits on how old the vehicle can be or how many miles it can have. For example, LendingClub Bank requires your vehicle to be less than 10 years old and have fewer than 120,000 miles.

2. Your current loan’s balance and remaining payments

Your existing loan’s balance and remaining payments can also be a factor. A lender might not want to refinance a loan if it has too low—or high—of a balance, or if you’re close to paying it off. With LendingClub Bank, you can refinance auto loans if you have at least 24 months of payments left and your balance is between $5,000 and $50,000. 

3. The loan-to-value ratio

Lenders may also look at the value of your vehicle relative to how much you owe on the loan, or the loan-to-value (LTV) ratio. A higher LTV can make it harder to get approved, especially if your LTV is over 100% and your car is worth less than the outstanding loan principal. 

4. Your debt-to-income ratio

Your monthly debt-to-income ratio (DTI) helps lenders understand how easy it will be for you to afford your monthly payment. Qualifying for a new loan can be difficult if you have a high DTI. 

5. Your credit history and score

Lenders will review your credit reports and score to help determine if you qualify for a loan and your loan’s rates. Having a long history of on-time payments and low balances on credit cards can help your credit. 

Refinancing a Car Loan With LendingClub Bank

With LendingClub Bank, you can quickly check your potential auto loan refinancing terms online with no impact to your credit score. If you qualify, you can receive and compare multiple loan offers before choosing the one that works best for you. Once you’ve picked an offer, complete the application and LendingClub Bank will pay off your current auto loan directly. 

How Does Refinancing a Car Loan Work FAQs

1. When should you refinance your car?

You could consider refinancing your car loan when you can qualify for a new loan with more favorable terms, such as a lower interest rate or monthly payment. But be sure to check that you won’t pay more in fees than you’ll save in interest. 

2. Is it a good idea to refinance your car?

Refinancing a car loan can be a good idea if your creditworthiness has improved, interest rates have dropped, or you want to change your loan’s terms. Check your loan offers online to find out if it makes sense. 

3. What is the downside of refinancing a car?

You may have to pay a fee to take out a new loan, transfer the title, or pay off your current loan early. Compare the cost of these fees and prepayment penalties to your potential savings. 

4. Does refinancing a car hurt your credit?

Applying for and taking out a new loan may impact your credit score in the short term. However, in the long run, refinancing won’t necessarily hurt your credit if you make your loan payments on time. 

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