How to refinance a car loan

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

You might have heard people talk about refinancing their homes to get a better interest rate. But did you know you might be able to do that with your vehicle loan, too? There are many reasons to refinance a vehicle loan, including potential interest savings if your credit has improved since you bought the car. This guide will walk you through whether refinancing a vehicle is right for you and how to refinance a car loan in five easy steps. 

What does refinancing a loan mean?

Refinancing a loan means taking out a new loan to cover the old debt. For example, imagine you bought a car for $20,000 and financed the entire purchase price. You’ve been paying on it for a while and now owe $15,000.

If you decide to refinance the loan, you get a new loan (with new terms) for $15,000. The funds from that new loan pay off the old loan, and you begin making monthly auto payments on the new loan.

Reasons to consider refinancing

Refinancing might sound like shuffling money around, but it can serve a purpose. Some reasons to consider refinancing a car loan can include:

• You have better credit now than you did when you first got the loan. You may get a better interest rate on a refinance and save yourself a lot of money over the rest of the life of the loan. For example, the difference between 3 percent and 6 percent on a $25,000 car loan over 60 months is close to $2,000.
• You want a lower monthly payment. You may be able to refinance with better terms or extend your loan, which can reduce your payment. For example, if you initially financed for 60 months, you could refinance for 72 months and lower your payments.
• You aren’t satisfied with your lender. If you don’t like the service at a specific restaurant, you dine elsewhere. If you don’t care for the quality of the goods at a particular store, you can start shopping somewhere else. And if you don’t like the quality of service you get from your current vehicle loan lender, you can refinance your loan and work with a different bank.

When to avoid a refinance

Refinancing a car loan can be beneficial, but there are some times when it’s not the right decision:

• Your loan exceeds your car’s value. The car market can fluctuate significantly at times, and car owners sometimes find themselves in a situation where their vehicle is worth less than the outstanding loan balance on the car. This situation is known as being upside down on your vehicle loan, or having negative equity. Securing approval for a refinance can be really challenging when your car is in negative equity. You’re probably better off making payments until your loan balance is below your car’s value—once that happens, you can consider refinancing.
• You’re applying for other loans. If you’re in the process of applying for other loans or credit—such as a mortgage—refinancing your car at the same time isn’t the best idea. This will cause you to have too many hard inquiries on your credit report in a short time, which can hurt your credit and affect your chances of getting approval on your applications.

How to refinance a car loan in five steps

While the details vary from situation to situation, the process for refinancing a car loan doesn’t. If you want to know how to refinance a car loan, you can follow the steps below in most cases.

1. Decide if refinancing is right for you

First, decide if refinancing a car loan is the right option for you. This financial process might impact your credit, so you should ensure you have a good reason for going through it. Weigh the benefits against any potential consequences.

For example, if you want to refinance to lower your car payment, you could refinance with a six-year loan. That could add several more years of payments—including interest—which could mean you pay more out over the life of the loan than you intended.

If you need the wiggle room in your budget right now but believe your income will increase in the near future, this might still be okay because you could benefit from the lower payment now and then pay extra on the loan in the future to pay it off faster.

Everyone’s situation is unique, but applying this type of forward thinking will help you make the right decision for you.

2. Gather information and check your credit

Once you’ve decided you want to refinance a car loan, start with a bit of research. Here’s some of the information you may want to gather:

• Information about your existing loan. This includes the interest rate, the monthly payment and your payoff amount. The payoff amount is around what you’ll need to borrow to refinance. It’s a good idea to know your interest rate and terms so you can tell if you’re getting a better deal with your refinance.
• Determine the current value of your car. As mentioned, if you have negative equity in your vehicle, securing a refinance approval might be difficult. However, if you have excellent credit, it still might be possible. You can find the value of your car on sites like Kelly Blue Book.
• Your current income and personal details. You’ll likely need to enter this on any loan application.
• Your credit score and an understanding of your credit history. Whether you can get better terms with your refinance may depend on whether your credit has improved or at least stayed the same, so it’s essential to know where you stand before applying for loans.

3. Shop around for the best terms

Research auto loan refinance options to find the best terms you can potentially qualify for. In some cases, you might be able to get pre-approved for loans based on the information you enter and a pull on your credit report.

If you go through preapprovals or approvals for several loan options, keep your applications all within around 14 days. This helps ensure the credit bureaus treat it like one inquiry instead of multiple hard inquiries. Hard inquiries hurt your credit slightly, so when you can limit them to one, it’s better for you.

4. Prepare and submit your loan application

Once you choose a lender, prepare and submit your loan application. Take your time entering all the information. A loan application could be denied simply because a typo made it impossible to pull your credit or made it look like you didn’t make enough money to afford the monthly payment.

If you apply for an auto refinance online, you may hear back within seconds. But in some cases, lenders might take one or two days to respond. They might also reach out to ask you for more information as they consider your loan. If you apply, keep an eye on your contact methods, such as emails or texts, and respond in a timely manner to any requests for documentation or clarification.

If you don’t respond, your loan application could be denied because the lender didn’t have all the information it needed to decide.

5. Begin making payments on your new loan

When the loan is approved, the new lender will make a direct payment to the old lender. Your old loan is paid off and closed, and you begin managing your new loan. Make sure you make payments on time on the new loan to avoid fees and negative reports to the credit bureaus. 

Refinancing your loan can be an excellent financial move if you’re saving money or getting a monthly payment that fits more reasonably into your budget. You can also use this new loan to build up your credit health if you’re responsible with the loan and pay on time.  If you think you might benefit from improving your credit, know there are resources out there that can help. Knowing how and what steps to take to improve your credit situation can feel overwhelming, but an easy first step is to take Lexington Law’s free credit assessment, which gives you your credit score, credit report summary and even a credit repair recommendation.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.