A Step-by-Step Guide to Refinance Your Car Loan

1. Consider whether car loan refinance makes sense

First, is refinancing the right move? To make this determination, review the terms of your existing car loan. What is the annual percentage rate (APR), monthly payment, current payoff amount and the loan’s remaining life/term?

Then analyze these terms against your available refinancing options. Will the available refinance car loan options provide cost savings and help you achieve your financial goals? For example, refinancing into a longer-term loan might lower your monthly payment. However, there is a tradeoff. You will end up paying more interest over the long run.

In addition, it’s crucial to analyze other factors that might limit your access to a new loan or increase refinancing costs. Here are additional factors to consider.

• Prepayment penalty: Does your current loan include a prepayment penalty? If it does, you will pay a fee for paying off your car loan earlier. For refinancing to make sense, your cost savings from the new loan should be greater than the prepayment penalty.
• Origination fee: Some lenders charge an upfront payment on refinance. It helps to weigh whether there are cost savings after paying this fee.
• Negative equity: If you owe more on your car loan than its value, you might struggle to find favorable refinancing options.
• Age and mileage of the car: Some lenders may have restrictions based on the age and mileage of the vehicle. For instance, some lenders don’t refinance cars over 100,000 mileage or 10 model years old. Speak with your lender on their specific restrictions.
• Current balance: Some lenders require a minimum of around $3,000 to $5,000 for a refinance. Check with your lender on minimum loan amount requirements.

If you want to lower costs, the new loan should have a lower interest rate. Additionally, the total cost, including prepayment fees, registration fees and title transfer fees, should be lower. It's important to choose a loan option that works best for your situation and goals.

2. Check your credit score

Your credit score has a significant influence on the loan terms you qualify for. A higher credit score typically increases your chances of qualifying for better interest rates and loan terms.

If you have a lower credit score, go through your credit report and check for any errors or issues you may be able to address before applying for a refinance on your car loan. Additionally, stay current on the existing car loan to increase your chances of qualifying for refinancing.

3. Estimate your car value

Before applying, you should have an estimate of your car’s value. Tools at Kelley Blue Book and Edmunds can assist you.

Usually, lenders consider the car’s loan-to-value (LTV) ratio to determine whether you qualify. The ratio divides the loan amount by the car’s value. Most lenders require an LTV ratio below 125% for car loan refinance eligibility.

4. Gather necessary documents

To initiate the refinance car loan process, gather essential documents your lender may request. Having all the documents ready beforehand can make the process faster. While specific requirements may vary, lenders generally request the following records during the application process:

• Proof of Identity: You need a valid driver’s license or government-issued ID.
• Social Security Number (SSN): Lenders use your SSN to verify your identity and pull your credit report.
• Proof of Income: Provide recent pay stubs or tax returns to demonstrate your ability to repay on the loan.
• Car Information: Provide details about your car, including the make, model, year and VIN (Vehicle Identification Number).
• Existing Loan Details: Include information about your current auto loan, such as the outstanding balance and the lender’s name.

5. Get prequalified and compare offers

To get the best terms, make requests to several lenders for pre-approval. Remember to consider credit union loans since their rates are usually lower. Applying for all pre-approvals within 14 days is recommended so that FICO treats them as a single inquiry.

In most cases, an online submission suffices. Depending on the lender, you could get a pre-qualification decision instantly or within hours. The decision specifies the rates and terms you qualify for. Use an auto loan calculator to determine your monthly payment based on the terms and rates offered.

6. Apply for refinancing

After analyzing the various decisions, submit your application to the chosen lender. Remember that an application comprises a hard inquiry and might lower your credit score.

What does it mean to refinance my car loan?

Refinancing your car loan involves taking out a new loan to pay off your existing auto loan.

Why should I consider refinancing my car loan?

Refinancing can help you save money by securing better loan terms, such as lower interest rates or more manageable monthly payments. It can also provide financial flexibility by extending the loan term if needed.

How do I know if I’m eligible for car loan refinancing?

Eligibility for car loan refinancing depends on factors like your credit score, income, employment stability, and collateral value. Lenders evaluate these criteria to determine your eligibility.

What documents are typically required for car loan refinancing?

Commonly required documents include proof of identity, Social Security Number (SSN), proof of income , and collateral information.