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How to Refinance a Car Loan – 6 Easy Steps for Better Auto Payments

Sometimes, you need to buy a car, even if your credit isn’t in a good place. If that happened to you, you might be stuck with a high-interest-rate car loan. 

While the auto loan you drove away with isn’t the best, you have some options. Any change in your financial situation for the better means you can qualify for a better loan, allowing you to refinance to get more favorable loan terms.

If you want lower monthly payments and a lower interest rate, refinancing your current auto loan is the way to go. 

How to Refinance a Car Loan

Refinancing your current loan can reduce your monthly payment, lower your interest rate, or shorten the loan term for a faster payoff. If you play your cards right, you’ll save money in the long run and reach your other personal finance goals sooner. 

But before you call a lender, follow these steps to ensure you get the best deal possible.

1. Determine Whether Refinancing Makes Sense for You

Refinancing isn’t right for everyone. The process takes time and can cost money, so you want to ensure you’ll benefit financially before you jump in. 

Ask yourself a few questions before you decide to go forward. 

  • What Interest Rates Are Available? Interest rates were at historic lows for a while but are starting to climb again. Before you start the refinancing process, confirm the available rates are actually lower than what you’re currently paying.
  • Does Your Current Loan Have a Prepayment Penalty? Some car loans have a prepayment penalty, meaning you have to pay a fee to pay off your loan before the end of the term. Depending on the size of the penalty, it can make it more expensive to refinance.
  • How Much Is Your Car Worth? The value of some vehicles drops quickly once you bring them home. If your car is older or doesn’t have a great reputation, it might not have a high enough value to justify refinancing your loan and a lender might not let you take out a new one.
  • How Long Do You Have Left on Your Original Loan? If you just got a loan and have a few years left to pay off it, refinancing it may be the right move. But if you’re almost finished paying off the loan, it might not make sense to get another one.
  • Do You Have Upcoming Large Purchases? You might want to hold off on refinancing if you have other big-time purchases coming up. For example, if you want to get a mortgage on a new home within the next few months, refinancing your car loan might be a roadblock to getting the best terms on a home loan.
  • How Much Does Refinancing Cost? In addition to the interest you pay, car loans typically have loan origination fees, a type of processing fee. Depending on the size of the fee, refinancing might cost you more money than it saves you.

2. Check Your Credit

You might not have had the best credit when you got your loan, but if you’ve been making on-time payments for a year or so, you’re likely in better shape now than you originally were.

The only way to know for sure is to check your credit score. Luckily, that’s pretty easy to do now. You can visit, provide your information, and access your reports from the three credit bureaus for free.

Generally, you can only access your report for free once per year. But the bureaus loosened up their rules during the COVID-19 pandemic and now let people take a peek at their reports weekly for free, though that’s unlikely to last.

Your credit card, credit union, or bank might also give you free access to your credit report and credit score. Often, free credit monitoring is available through a financial institution’s mobile app or website. 

If you don’t like what you see on your credit report, you have options. First, reach out to the credit reporting agency if you notice any mistakes on the report. Mistakes can include:

  • Closed accounts being reported as open accounts.
  • A misspelling of your name.
  • Accounts belonging to someone else, usually a person with a similar name.
  • Multiple listings of the same debt.

If you’re not happy with your credit report because of your own actions, such as late payments or missed payments, you can take steps to improve your credit. But raising your credit score can take time.

Anything over 780 will get you the best rates, while a score between 661 and 780 will get you a decent rate. If your score is under 660, you can still get a car loan, but the interest rate will be high.

If you’re happy with your credit score and the results of your credit check, you can proceed with the next steps. 

3. Gather the Relevant Documents

You need to give the lender several documents when applying for a car loan. To make the loan application process go as smoothly as possible, get your paperwork in order before contacting any lenders. You need to have:

  • Personal Details. The lender will most likely need your Social Security number, driver’s license, current address, and details about other loans or financial obligations you have.
  • Vehicle Identification Number (VIN). Your car’s VIN is like its fingerprint. It’s a 17-character code that identifies your specific vehicle. It’s usually on the driver’s side where the dashboard meets the windshield. It’s on a metal plate and should be visible from the outside. Along with the VIN, it helps to have other details about your car, like the number of miles on it and its model year.
  • Proof of Insurance. You most likely need to have auto insurance just to own a vehicle legally. Your lender needs to see proof of coverage.
  • Proof of Income. Gather proof of your income, such as your pay stubs, W-2s, or income tax returns. Your income influences whether you can get approved for a refinance and the rate you get.
  • Details About Your Current Loan. When you refinance, you pay off the existing loan with the new loan. The lender needs to see the details of your current loan, such as the lender name and amount. 

4. Get Prequalified

It pays to shop around when refinancing your car loan. Prequalification gives you a good idea of the interest rate, loan term, and amount you can borrow. 

Getting prequalified isn’t the same as submitting a loan application. The lender just looks at your current loan, your credit, and the type of car. Using that information, they can give you a rough estimate of the type of loan you can get. 

Prequalification is a soft credit inquiry, so it won’t cause your score to drop. It’s also not a guarantee of anything. You might prequalify for a certain rate, but once the lender does a hard credit check and looks more closely at your financial documents, you might end up with a different loan offer.

Still, find out if you can get prequalification from several lenders before moving forward. 

If you can’t get a lender to prequalify you, now isn’t the time to refinance. It could be due to your credit, which you can fix, or the age or value of your car, which you can’t.

5. Compare Offers

Ideally, several lenders will prequalify you. The more prequalification offers you have, the better you can compare car loans. The loan term, interest rate, and monthly payment affect how expensive the new car loan will be.

  • Loan Term. The loan term is how long you have to pay off the balance. A longer term usually means a lower monthly payment, but you’ll pay more interest over time. You can choose the loan term, usually in 12-month increments, usually up to 84 months (seven years).
  • Interest Rate. Ideally, when you refinance your car loan, you get a lower interest rate than you currently have. The rate available to you can vary from lender to lender.
  • Monthly Payment. The monthly payment is how much you have to pay every month, including principal and interest. A rock-bottom monthly payment looks appealing but often means the loan term is longer and you pay more in the long run. A higher monthly payment gets your loan paid off sooner but might strain your budget.
  • Fees. Your new auto loan might have several fees, such as a lender fee, origination fee, and title fee. Compare the costs of each fee and weigh the fees’ costs against the cost of interest. For example, a loan with higher upfront fees might have a significantly lower interest rate, so you still save money in the long run.

When you’re reviewing your offers, the big question to ask yourself is whether you want lower payments at a higher cost over time so it fits into your monthly budget or bigger payments at a lower cost so you can pay your debt off sooner (and cheaper).

6. Submit Your Application

Once you’ve picked a lender to work with, the rest is pretty easy. Fill out the application and provide any documentation or details the lender requests. 

As you go through the refinancing process, keep making payments on your current car loan. You’re still responsible for the payments until the new lender approves your application and pays off the current debt.

If all goes well, you’ll get approval from your lender. You can then read and sign the contract for the new loan. When reviewing the contract, be clear on when your first payment is due and when the refinancing company will pay off the current debt. If you have a payment coming due before the refinancing is complete, pay it to avoid a late payment showing up on your credit.

Final Word

If your current car loan has a high interest rate, high monthly payment, or just doesn’t work for you, refinancing can get you a more affordable loan or give you the financial flexibility to reach other financial goals. 

Compared to refinancing a mortgage, refinancing a car loan is pretty straightforward. You don’t have to have your car appraised or go through a complex closing process all over again. Once you’ve submitted your application, you can expect the refinancing process to be over and done in a matter of hours.

Amy Freeman is a freelance writer living in Philadelphia, PA. Her interest in personal finance and budgeting began when she was earning an MFA in theater, living in one of the most expensive cities in the country (Brooklyn, NY) on a student's budget. You can read more of her work on her website, Amy E. Freeman.