Key takeaways

  • Refinancing 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.

Not all drivers qualify for competitive rates when they first take out a car loan. If that is the case for you, taking out a refinance loan may help lower your interest rate. Refinancing involves replacing your current loan with a new one with a different length, interest rate or both.

A lower rate can help reduce your monthly payments and interest costs. You will need to know how to refinance a car loan, have good credit and have a track record of on-time payments.

How to refinance a car in 6 steps

Refinancing a car loan is similar to getting a car loan. Start by reviewing your current finances and loan documents. Then, find the right lender.

1. Decide if refinancing is the right financial move

If refinancing your vehicle will save you money, it’s likely the right choice. If you can’t get a lower interest rate through refinancing, it may not be a great idea.

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

Car loan refinance rates may be better than your current rate if:

  • You took out your auto loan when car loan interest rates were high (and they’ve since dropped).
  • Your credit score has improved since you got your loan.
  • Your car has positive equity, meaning you owe less than the car is worth.

Scenario 2: You need a lower monthly payment

You can refinance your car loan to a longer term to lower your monthly payment. However, if you don’t lower your interest rate, you will pay more interest over time. Compare the pros and cons of refinancing before making a decision.

2. Review your current loan

Most lenders require a minimum loan amount of around $3,000 to $7,500 to refinance. Check your payoff amount online or by contacting your lender to determine if you qualify.

In addition, you will need to pick a loan term of at least 12 months. You can still refinance if you have less than a year left on your loan. However, it may be less expensive to 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.

3. Check your credit score

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.

Your credit score may have improved if you have made smart money decisions since your first loan. Maybe you paid down credit card debt and made on-time payments, for example. 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.

4. Estimate your car’s value

Resources like Kelley Blue Book and Edmunds make estimating what your car is worth easy. A lender may be unwilling to refinance a vehicle with over 100,000 miles or older than 10 years. This lowers the resale value significantly, making your loan riskier for the lender.

Refinancing could save you money if your car is newer with low mileage and a sizable balance. You may be out of luck if it’s worth less than what you owe. A lender may be much less willing to refinance if you’re already underwater on your current loan.

5. 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 for errors before submitting.

Follow up with both lenders once you get full approval. 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 tip
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.

6. Compare lenders

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.

Know your goals

If you want to lower your monthly payment with a longer repayment term, understand how that will impact your interest costs. If you are refinancing at a lower rate, make sure you save enough in interest to offset any fees.

Consider a shorter loan term if you have extra room in your budget. You’ll pay the loan off faster and may save money in interest, depending on your loan terms.

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 save on interest is more than the prepayment penalty. For instance, imagine your lender would charge a $500 fee for early payment. You’ve determined your refinanced loan will save you $300 in interest. In this case, it will cost you $200 to refinance, which means refinancing isn’t worth it.

Shop for the best rates

All lenders weigh your credit score, financial history and eligibility differently. Online lenders, for example, tend to use factors like employment or income when determining your rates.

No matter your credit, it is smart to shop around at banks, credit unions and online options.

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.

Keep in mind, you can refinance multiple times. This may be something to consider if your situation changes and you’re able to get better rates, terms, or perks.

Where to refinance an auto loan

Sometimes, you can refinance with the lender who funded your original loan. But before taking that route, it’s wise to consider additional refinancing options to find the best deal.

Refinancing option Features Who it’s best for
  • In-person customer support
  • Potentially more strict underwriting criteria
Borrowers with good to excellent credit who want access to the lowest rates available.
Credit unions
  • Products only available to members
  • Lower interest rates
Borrowers with an established relationship or membership with the institution.
Online lenders
  • More flexible lending requirements
  • Faster funding timelines
Borrowers who may not qualify for refinancing through a bank or credit union due to their imperfect credit score. It’s also best for people who want the convenience of a fully online experience.

Factors to consider before refinancing

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

  • Requirements for refinancing: Every bank or lender has its own criteria to determine your eligibility. 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: Are you 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 lenders consider. 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. If refinancing isn’t right for you, consider alternatives, like trading in your car.