How to refinance your car loan and when to do it

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If you secured your original auto loan through a dealership, you may not have received the most favorable interest rate. And falling rates might make your current rate seem like even more of a bad deal. Refinancing allows you to take out a new loan with new terms to replace your current loan, which can help you get lower monthly payments and potentially lower costs over the life of the loan.

When should you refinance your auto loan?

There are two main reasons to refinance: you can get a better rate or you’re struggling to make your vehicle payments.

The first scenario is common if you took out your auto loan when interest rates were high or when you had a low credit score. If your credit score has improved since you got your loan, lenders will offer you better terms, which will help you save money over time.

On the other hand, if you feel like you’re stretching your monthly budget with your current payment, you can refinance your car loan to a longer term. By extending your repayment term, your monthly payments will decrease — but keep in mind that you might also pay more in interest over time.

When is it a bad idea to refinance your auto loan?

The key to knowing if refinancing your vehicle is the right choice is whether you’ll save money. If you can’t get a lower interest rate through refinancing, it’s not a great idea; refinancing to a higher interest rate will make your loan more expensive. Similarly, if you have to deal with prepayment penalties or other fees when refinancing, those extra costs could offset any savings you get.

You may also be unable to refinance if you have an older vehicle that has racked up a lot of mileage. A car with high mileage is unnattractive to lenders, and many won’t refinance these vehicles at all due to their age and history.

Factors to consider before refinancing

Here are some factors to consider before you decide to refinance your vehicle:

  • Requirements for refinancing: Every bank or lender has different requirements that determine whether or not you’re eligible for refinancing. Some specific things to look for before deciding to refinance are a clean car title, whether you’re upside-down on your loan and whether you’ve been current with payments.
  • Prepayment penalties: A prepayment penalty is the fee that you must pay if you pay off your loan early. Not all lenders charge this, but it could affect your overall savings.
  • Time remaining on the loan: If you’re near the end of your current loan, it may make more sense to finish paying it off instead of sinking time and money into refinancing.
  • Your financial state: Your debt-to-income (DTI) ratio is one of the many factors considered by lenders. The more debt you’re able to pay off before applying for a new loan, the better terms you’ll receive.

How to refinance a car loan in 6 steps

Here’s a step-by-step guide to evaluate your current loan and submit an application to refinance your car.

1. Review your current loan

Educate yourself on your existing loan to understand exactly how much you’ve been paying in interest, what your monthly payment is and what the total cost of the loan will be if you finish the entire term. Refinancing at a lower rate could save you money, but you won’t know for sure if you don’t know your current rate.

The bottom line: Education is power when it comes to getting the best deal. Take advantage of an auto loan calculator to understand how much you’re paying on your existing loan.

2. Check your credit score

Do you remember what your credit score was when you secured your original auto loan? If you’ve made smart money decisions since then – paying down your credit card debt and making on-time payments, for example – your credit score may have improved. Lenders will now view you as less of a risk and offer you better rates.

The bottom line: The better your credit score, the lower refinance rate you’ll receive from a lender.

3. Estimate the value of your car

The cost of your loan isn’t the only factor to consider when thinking about whether to refinance. You’ll also want to get a sense of what your car is worth. To do this, you can use resources like Kelley Blue Book.

If your car is newer with low mileage and a sizable balance that will still take years to pay off, you may be a good candidate to refinance. If it’s worth less than what you owe, you may be out of luck. If your vehicle is almost paid off, it makes less sense to refinance, since interest currently makes up a small portion of your remaining payments.

The bottom line: Knowing the value of your car will help you determine whether lenders will be willing to refinance.

4. Shop around for the best refinancing rates

Not all interest rates are created equal — all lenders will weigh your credit score, financial history and eligibility differently. If you’ve decided to refinance, start with the bank you use for other services, such as your checking and saving account. Some financial institutions offer discounts on interest rates for existing customers. Then compare that rate with rates from other lenders to get a clearer view of what top lenders are offering. A rule of thumb is to get prequalified with around three lenders.

The bottom line: Interest rates vary widely, so compare deals at a few banks and credit unions.

5. Determine how much you’d save by refinancing

After you’ve shopped around for rates and understand what you may be able to qualify for, do the math to see how much you’d save by refinancing your car loan. An auto loan refinance calculator can help here.

The bottom line: Doing the math ahead of time will let you see how much money a new rate could save you on interest, monthly payments or both.

6. Get your paperwork in order

Before you submit an application to refinance your car, gather all documentation the lender will need to review. You will need to provide proof of income, proof of insurance and details of your existing loan. Be prepared to show W-2s, paystubs, utility bills, insurance cards and more. You will also need to have your vehicle’s make, model, mileage and VIN ready.

The bottom line: Organize your documents ahead of time to speed up the refinancing timeline.

How the coronavirus has impacted auto loan refinancing

Due to the economic impacts of COVID-19, many lenders have introduced relief options for their customers. If you’re struggling to make auto loan payments, you may have options for deferment.

Interest rates have also been low since March 2020, which makes now a great time to refinance. But with this drop in rates and surge in interest, lenders have also enforced more strict rules when it comes to refinancing. Most lenders do not accept unemployment as the primary source of income, and many have raised their credit score requirements.

The best way to see how your personal auto loan refinance options have been impacted by the pandemic is to get quotes from a few lenders.

Next steps

Refinancing your car loan can make a big difference in your personal finances. The current interest rate environment is a great time to consider your refinancing options, though it’s not the best option for everyone — if you’re thinking about refinancing, investigate auto loan rates and compare those terms with the terms of your current loan.

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Written by
Rebecca Betterton
Auto Loans Reporter
Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ins and outs of securely borrowing money to purchase a car.
Edited by
Student loans editor