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How to refinance your car loan

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If you secured your original auto loan through a dealership, you may not have received the most favorable interest rate. Refinancing your car loan allows you to take out a new loan with new terms to replace your current one — which can help you get lower monthly payments and potentially lower costs over the life of the loan. 

7 steps to refinance your auto loan

To refinance your car loan, you’ll need to evaluate your current loan and apply — this step-by-step guide will take you through how.  

1. Decide if refinancing is the right financial move 

Before diving into the refinance process, you must first decide if refi is the best financial option for you. 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 likely 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 you will likely pay more in interest over time. 

The bottom line: 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. 

2. Review your current loan

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.

3. 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 view you as less of a risk and may offer you better rates. 

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

4. 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. And 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 can help you determine whether lenders will be willing to refinance.

5. 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. Some financial institutions offer discounts on interest rates for existing customers.  

Compare the rate offered by your current bank with rates from other lenders to get a clearer view of what top lenders are offering. A good rule of thumb is to get prequalified with at least three lenders. 

The bottom line: Interest rates vary widely, so compare deals with a few lenders.

6. 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. 

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

7. 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, pay stubs, 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. 

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 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’re current on 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 receive will be. 

Next steps 

Refinancing your car loan can make a significant difference to your personal finances. 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