How to Refinance a Car: The Ultimate Guide
Thinking about refinancing a car loan, but not sure where to start? Whether your goal is to lower your monthly car payment and free up monthly cashflow or reduce your total interest cost and make sure you’re getting the best overall deal, our guide is here to help! We’ll explain how auto refinancing works, then show you how to refinance a car in four simple steps.
How does auto refinancing work?
Refinancing your car loan means applying for a new auto loan with a lender, then using that loan to pay off your existing auto loan. You’ll make payments to the new lender until your loan is paid off, and the new lender’s name will appear on your car’s title.
Most people consider refinancing a car loan for one of two reasons. First, they may want to lower their car payment and free up monthly cashflow, which can be achieved by getting a longer term on your loan. Another reason is to save money on the total cost of your auto loan—if you can get a lower interest rate through refinancing, you’ll save on total interest and potentially lower your payments, as well.
How to refinance a car in three simple steps
1. Find out if refinancing makes sense for you
Should you refinance your car loan? You might benefit from refinancing if one or more of these situations applies to you:
- Interest rates have declined. If interest rates have gone down since you initially financed your car, it might make sense to refinance and lock in a lower rate. Lowering your interest rate by even a little can save you big bucks on interest, which can reduce your monthly payment or empower you to pay off your loan sooner (pro tip: many sources allow you to check what your new rate would be without impacting your credit).
- Your credit score has improved. If your credit score is better now than it was when you first took out the loan, you might qualify for a better interest rate. Something as simple as making on-time payments for your current loan may have boosted your score enough to warrant a lower interest rate. Not sure what your credit score is? Check it for free at Credit Karma.
- Your current loan is from a dealership. If you financed your car through a dealership, chances are you could get a better interest rate. Auto dealers often mark up the interest rate, charging as much as three percentage points more than the annual percentage rate (APR) you might have qualified for with another lender. Refinancing could help you find a more favorable rate.
- You’re struggling with your current payments. Whatever the reason—maybe a job loss or an unexpected expense—you’re having a hard time making your current car payment. Refinancing to a loan with a longer term could lower your monthly payments and relieve stress.
- You have had a major life event. Has life recently gotten more expensive? If you recently bought a new house, had a child, got married or sent kids to college, you might want to lower your monthly payments and free-up cash flow. Refinancing to a loan with a longer term could lower your monthly payments.
It’s also important to assess your car’s approximate value. Check out Kelley Blue Book to see what your car is worth. To refinance your auto loan you can owe slightly more than the value of your car. But if you owe twice as much as the car’s value that is known as being upside-down or under water on the loan and refinancing can be difficult.
2. Shop around
Check your rate at several car loan refinancing companies to find a competitive offer. A few tips:
- Have your documents in order. Most lenders will require your Social Security number, driver’s license and car registration. It is also helpful to have your car’s vehicle identification number (VIN). You’ll also need to know the payoff amount for your existing loan—this is the amount you’ll need to refinance.
- Read the fine print about eligibility. Lenders will often have rules about which loans and cars are eligible for refinancing—for example, a minimum outstanding balance of $5,000 and less than 120,000 miles on the car. Save time by identifying each lender’s eligibility requirements before you apply.
- Understand if it’s a hard inquiry on your credit report when you apply. Most lenders use a hard credit inquiry, which can impact your credit score.
- Get it done within 15 days. If an application is a hard credit inquiry, “Make sure you submit all your loan applications within a 15-day period,” says NerdWallet. “Similar queries in this time period are grouped together and treated as one, which lessens the impact on your credit score – it will trigger only a small drop, about five points.”
3. Evaluate offers
An auto loan calculator can help you quickly determine how each refinancing offer could impact your situation. Be sure to look at total monthly payment savings and also on how much you are saving over the life of your loan. Be sure to account for any prepayment penalties (i.e. fees for paying off your loan early) on your current loan. While rare for auto loans, prepayment penalties can impact the refinancing equation.
Calculate how much you could save over the life of the loan, how much you could lower your monthly payment, and how quickly you could pay off the loan. With this knowledge in hand, you can confidently decide which refinancing offer will help you accomplish your financial goals. Here is an example of what current customers are saving through LendingClub.