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Looking to save money on your car loan?
Refinancing could lower your monthly payments and reduce interest costs. And that might mean more money in your pocket to possibly pay off your loan faster or free up cash for other expenses.
The refinancing process begins with reviewing your current loan terms and comparing them against what’s currently available on the market. A credit score check can also give you an idea of the rates and terms you might qualify for.
Learning when and how to refinance a car loan is a smart way to maximize savings and take control of your finances.
Auto refinancing means replacing your current car loan with a new one. When timed right, this can result in lower interest rates or more favorable terms.
The entire process can sometimes happen within a few hours, with many lenders providing immediate loan decisions.
Refinancing your auto loan begins with research. Start by reviewing your current loan terms, getting a sense for your car’s value and checking your credit score. Then comes the application process and comparison shopping. After you choose a lender, you’ll work with them to sign documents and finalize your new loan.
Here’s what to expect in the auto refinancing process, distilled into seven straightforward steps.
Before refinancing, dig into the details of your existing auto loan to determine whether refinancing is the right move.
Pay attention to key factors like your monthly payments, APR and remaining loan balance. You’ll use this information to compare your loan directly against what’s currently available on the market.
A pulse check of your vehicle’s market value is another critical step in refinancing your car loan.
A common hurdle for many borrowers is negative equity, which occurs when you owe more on your loan than the car is worth. This makes refinancing more difficult, as lenders are less likely to offer favorable terms.
In other words, refinancing may not yield the savings you expect if you’re “upside down” on your loan. Therefore, it’s essential to assess where your loan balance sits in relation to your car’s current value.
The key metric to watch here is the loan-to-value (LTV) ratio, which represents the amount you owe on your auto loan compared to its market value. A lower LTV means less risk for lenders — and that can result in more favorable loan terms for you.
Tools like Kelley Blue Book and Edmunds can help you estimate your car’s value.
Lenders consider credit scores when evaluating loan applications. Higher scores typically result in better offers, which can save you money over the life of the loan.
Getting a feel for your credit score and history — and potentially taking steps to improve your score — can go a long way toward scoring the best refinance rates and terms.
Knowing your score gives you an idea of where you stand in the eyes of lenders. It can also tip you off to any errors or issues that are negatively affecting your score. Further, if your score has improved since you first took out your loan, you may qualify for lower interest rates.
You can check your score for free with platforms like AnnualCreditReport.com. Ensure you’re using a reputable site, though, as the Federal Trade Commission (FTC) has warned of entities offering “free” reports as a guise for collecting personal information.
Streamline the refinancing process by gathering the necessary documents for your loan application upfront.
Lenders generally require your driver’s license and vehicle identification number (VIN). Also be prepared to provide your Social Security number, proof of income (such as recent pay stubs or tax returns), proof of residence (like a utility bill) and proof of employment.
You’ll also need details about your current loan, including the loan balance and the lender’s name.
As you explore your auto loan refinancing options, shop around and compare offers from multiple lenders.
When comparing offers, focus on interest rates and loan durations.
Here are three quick tips to get better rates:
After comparing offers, it’s time to submit your refinance application.
If you’re comparing multiple lenders, you can generally submit multiple applications within 14 to 45 days to minimize the impact on your credit score. Credit bureaus effectively treat them as a single inquiry, enabling you to shop for the best rates without damaging your score.
Once approved for refinancing, it’s time to finalize your loan.
Carefully review the new loan terms and confirm details like the interest rate and repayment period. Pay close attention to the details to avoid hidden fees.
Choose a payment schedule that fits your budget and consider setting up automatic payments to avoid missing due dates. And don’t forget to confirm that your new lender pays off your old loan completely.
It might be time to explore auto loan refinancing when:
Check out our auto refinancing resources for more guidance on how to refinance your car loan.
Learn more about the auto loan refinancing process by reviewing the following frequently asked questions.
To refinance, you’ll need your driver’s license, vehicle identification number (VIN), proof of income (pay stubs), proof of residence and the details of your current loan (e.g., your lender information and loan balance).
Lenders may also ask for your Social Security number and employment verification.
Being organized and providing these documents upfront streamlines the application process and helps you secure favorable terms.
When comparing lenders, focus on key factors like interest rates, loan terms and additional fees. Getting prequalified with multiple lenders allows you to compare potential offers without a hard credit inquiry.
You can also use our auto loan refinancing calculator to estimate how different offers impact your monthly payments and total loan costs.
Your credit score is among the biggest factors in determining the interest rate and loan terms you qualify for when refinancing a car loan. A higher score will typically mean better offers, which will save you money over the life of your loan.
Regularly check your credit report for errors and potentially take steps to improve your score before applying to enhance your chances of securing better auto refinancing terms.
Refinancing a car loan can be challenging if you are in a negative equity position (i.e., you owe more than your car is worth). This might lead to lenders offering you less favorable loan terms or rejecting your application outright. However, most lenders will allow you to roll a small amount of negative equity into a new loan.
Evaluate your loan-to-value (LTV) ratio before refinancing. Consider making additional payments to reduce the balance or waiting until the car’s value aligns more closely with the loan balance.
Explore ways to pay off your car loan faster, save on interest, and reduce financial stress with strategies that help eliminate debt quicker.
