Not everyone qualifies for competitive rates when they first take out a car loan. A refinance loan can lower your interest rate. It involves replacing your current loan with a new one with a different length, interest rate or both.

A lower rate can help lower your monthly payments and the costs you’ll pay over the life of the loan. But to make the most of refinancing, you will need to know how to refinance a car loan, have good credit and have a track record of on-time payments.

Key takeaways

  • Refinacing your vehicle loan is a good financial choice in two situations: if you can secure a better rate or if you need a lower monthly payment.
  • Consider the amount of time remaining on your loan before exploring options to ensure you qualify for the new loan.
  • To decide if refinancing is a good idea, compare your current rates and terms against the new one and make sure any prepayment penalty doesn't outweigh the savings.

Auto loan refinancing in 6 steps

Refinancing a car loan is similar to getting a car loan, with a couple of extra steps. Start by reviewing your current finances and loan documents, then find the right lender to meet your needs.

1. Decide if refinancing is the right financial move

There are two main reasons to refinance: if you can get a better rate or if you are struggling to make payments.

Scenario 1: You can get a better rate

If you took out your auto loan when interest rates were high or your credit score has improved since you got your loan, lenders will likely offer you better terms. A lower rate and similar loan term will help you save money over the loan’s lifetime. A lender may also offer you better terms if your car has positive equity, meaning you owe less than the car is worth.

Scenario 2: You need a lower monthly payment

On the other hand, you can refinance your car loan to a longer term in order to lower your current monthly payment. Extending your loan term decreases your monthly payment — but you will likely pay more in interest over time.

Bankrate insights
If refinancing your vehicle will save you money, it’s likely the right choice for you. If you can’t get a lower interest rate through refinancing, it may not be a great idea. Refinancing to a higher interest rate will make your loan more expensive, even if your monthly payments shrink.

2. Review your current loan

Most lenders require a minimum loan amount of around $3,000 to $5,000 in order to refinance. Check your payoff amount either online or by contacting your lender directly to determine if you qualify.

In addition, you will need to pick a loan term of at least 12 months. If you have less than a year left on your loan, you can still refinance. However, it may be less expensive to simply finish paying off your current loan instead.

It is also important to understand a few things about your current loan before you refinance:

  • How much interest you have been paying
  • What your monthly payment is
  • The total cost of your current loan

Gather that information to compare your current loan with options from new lenders.

Bankrate insights
Use an auto loan calculator to understand how much you are paying on your existing loan and compare it to your refinance options once you apply to prequalify.

3. Check your credit score

Your credit score and history are major factors lenders consider when you apply for refinancing. If you have made smart money decisions since your first loan — paying down 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.

Check your credit score before you start applying. This will help guide you toward lenders you qualify for and predict potential rates. Even if you have bad credit, you may still be able to get a loan with a lower rate by finding the right lender.

Bankrate insights
The better your credit score, the lower the interest rate you will likely receive from a lender. However, your payment history and current debts also matter to lenders when you refinance.

4. Estimate your car’s value

You should know what your car is worth. Resources like Kelley Blue Book and Edmunds make estimating your car’s value easy. Similar to loan size, a lender may be unwilling to refinance a vehicle that has over 100,000 miles or is more than 10 years old. This lowers the resale value significantly, making your loan riskier for the lender.

If your car is newer with low mileage and a sizable balance that will still take years to pay off, refinancing could save you money and prevent you from going upside-down on your loan. If it’s worth less than what you owe, you may be out of luck. A lender may be much less willing to refinance if you’re already underwater on your current loan.

Bankrate insights
Knowing the value of your car can help you determine whether lenders will be willing to refinance. If your vehicle isn’t worth much, refinancing could cost you more money than you’d save, especially if you can’t secure a lower interest rate.

5. Determine your savings

Do the math to see how much you would save by refinancing your car loan. Use an auto loan refinance calculator to make the comparison easy.

Check for fees

Check your current loan for fees. Some lenders charge a prepayment penalty, making it more expensive to refinance.

You need to be sure that the amount you are saving on interest is more than the prepayment penalty. For instance, if your lender would charge a $500 fee for early payment, but your refinanced loan is only going to save you $300 in interest, it will actually cost you $200 to refinance — and that means refinancing isn’t worth it.

Know your goals

If you want to lower your monthly payment, make sure the new loan won’t cost too much more if you opt for a longer repayment term. If you are refinancing at a lower rate, make sure you save enough in interest to offset any fees.

A shorter term than your current loan may also be worth considering if you have extra room in your budget. You’ll pay it off faster and may save money in interest, depending on the terms you receive on the new loan.

Shop for the best rates

All lenders weigh your credit score, financial history and eligibility differently. Fortunately, there are plenty of lenders to choose from, including:

  • Banks and credit unions. Start with the bank or credit union you use for other services. Some financial institutions offer discounted interest rates to existing customers.
  • Online lenders. Online lenders are a great source if you don’t have the best credit. Many offer competitive rates and quick application processes that can get you refinanced in a matter of days.

Compare the rate offered by your current loan bank with rates from other lenders to get an idea of what you might qualify for. When you are ready, get preapproved with at least three lenders. With multiple offers, you can see which option is the best for your financial goals.

Bankrate insights
Checking for fees, understanding your goals and comparing rates will let you see how much money a new rate could save you in interest, monthly payments or both. Interest rates vary widely, so shop around to find the best fit for your budget.

6. Get your paperwork in order

Preapproval is important, but it’s not the end of the process. When you apply, plan to provide the lender with these documents:

  • Proof of income: W-2s, recent pay stubs, bank statements or tax returns
  • Proof of residency: Recent utility bill, lease agreement, monthly mortgage statement or tax bill
  • Proof of insurance: recent monthly statement or insurance cards
  • Details about your existing loan: Balance, interest rate, loan term and monthly payment
  • Details about your vehicle: Year, make, model, mileage and vehicle identification number (VIN)

Be sure to go over your application and documents to double-check for errors before submitting.

Once you submit the paperwork and get full approval, follow up with both lenders. If you receive a check, ensure that your previous lender receives it and applies it to your loan. If your new lender is paying off the old one, follow up frequently to avoid missing payments due to clerical errors.

Bankrate insights
Organize your documents ahead of time to speed up the refinancing timeline. Be prepared to contact both lenders to ensure your payoff and payments go to the right places.

Factors to consider before refinancing

Before jumping into the refinancing process, make sure it makes sense for you.

  • Requirements for refinancing: Every bank or lender has its own criteria to determine if you are eligible for refinancing. Be sure you are not upside-down on your loan and are current on payments.
  • Prepayment penalties: Many auto loans include clauses specifying how and when you can pay off the loan. These clauses may include a prepayment penalty, a fee assessed if you pay off the loan early. Not all lenders charge this, but it could affect your overall savings.
  • Time remaining on the loan: If you are 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 health: Your debt-to-income ratio is one of the many factors considered by lenders. The more debt you can pay off before applying for a new loan, the greater the likelihood of receiving competitive loan terms.

The bottom line

Refinancing your car loan can significantly impact your personal finances. But before you apply with a lender, check auto loan rates and compare those terms with the terms of your current loan.

By shopping around and working on improving your credit score if needed, you may be able to reduce the total amount you pay or get a more affordable monthly payment by switching lenders.