Refinancing a Car Loan in 6 Steps

By | March 26, 2024

Refinancing a Car Loan: If your current interest rate is higher than rates now available, refinancing could lower your monthly payments. Rates fluctuate over time, so it pays to check periodically. You’ll want to refinance if you can get at least 2 percentage points lower than your current rate.

Other good times to refinance an auto loan include:

  • Your credit score has improved significantly since you took out the original loan. Better credit means better rates.
  • You want to shorten your loan term to pay off your car faster and reduce the total interest paid.
  • You need to lower your monthly payment due to financial hardship like job loss or reduced income. Extending the repayment timeline eases the monthly burden.
  • You want to remove a co-signer from the loan obligation. Once your credit warrants it, refinancing in only your name releases the co-signer.

In most cases refinancing doesn’t extend the length of the loan, but you can potentially negotiate that if needed to make payments more affordable. Evaluate the total interest costs before deciding.


Refinancing offers the flexibility to adjust your auto financing for easier monthly payments, faster payoff, or better rates. Review your situation annually or when needs change to maximize savings.

Refinancing a Car Loan in 6 Steps

Step 1: Review Your Current Auto Loan Terms

Before refinancing your car loan, take a good look at your current loan terms to determine if refinancing makes sense. Gather all your paperwork about your existing auto loan and review key details including:

  • Interest rate – What annual percentage rate (APR) are you currently paying? If it’s over 4-5%, refinancing could potentially save you money.
  • Loan balance – How much do you still owe on the loan? The higher the balance, the more potential interest savings when refinancing.
  • Loan term/months remaining – How many more months do you have left to pay off the loan? If you have at least 12-24 months left, refinancing may be worthwhile.
  • Prepayment penalties – Does your current lender charge any fees for paying off the loan early? Make sure to check.

Carefully looking over this information will give you a sense of whether refinancing makes good financial sense for your situation. If your current interest rate seems on the high side given today’s rates or you have a good amount left on the loan balance and term, refinancing could allow you to secure a lower rate and monthly payment.

On the other hand, if you don’t have much left to pay off or don’t see much difference between your current rate and available refinance rates, the cost to refinance may not justify doing so. It’s a personal decision based on your loan details and financial priorities.

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Step 2: Check Your Credit Score and Report

When it comes to refinancing your car, your credit score and report are key. Before applying to refinance, take some time to understand where your credit stands.

Check your credit score through a site like Credit Karma or from your bank. Aim for a score over 700, which will qualify you for the best rates. If your score is lower, take steps to improve it before applying.

Also get a copy of your credit report. Make sure there are no errors dragging your score down. If you find mistakes, dispute them with the credit bureaus.

While you have your report, verify all the accounts listed are actually yours. Unfortunately, identity theft is common. If you spot unfamiliar accounts, take action immediately to protect your credit. Contact the credit bureaus to report fraud.

Review the hard inquiries section as well. Limit applications for new credit cards, loans, etc which produce hard inquiries. Too many in a short timeframe can negatively impact your rate.

Pay down credit card balances below 30% of the limit. High utilization also cuts into your score. Consider making payments before applying to refinance if possible.

With excellent credit, you can qualify for the lowest rates available, saving substantially over the loan’s term. Putting in time to maximize your score and report clarity sets you up for approval on the best terms.

Step 3: Research New Loan Terms and Lenders

Time to shop around! Now that you know your credit score and current loan details, start researching new auto loan rates and terms. Here’s what to look at:

  • Interest rates: Interest rates have a major impact on your overall loan cost. Even a small rate reduction of 1-2% can save thousands over the life of a 5-6 year loan. Review interest rates from banks, credit unions, and online lenders.
  • Fees: Look closely at any origination fees or prepayment penalties a lender may charge. You want to avoid fees and lock-in terms allowing you to pay off the loan early with no penalty.
  • Loan term length: Extending your loan term from 4 years to 6 years will lower the monthly payment, but increase the total interest paid over the life of the loan. Evaluate what monthly payment fits your budget.
  • Lender reviews: Check online reviews and complaints for each lender you consider to ensure they provide good customer service. You’ll be making payments to this company for years.

Cast a wide net and get rate quotes from at least 3-4 different banks, credit unions or online lenders. Having multiple offers in hand will allow you to leverage the best rate and terms when you apply. Be sure to compare all the key factors – not just the interest rate – to make an informed decision.

Step 4: Compare New Loan Terms to Your Current Loan

Refinancing only makes sense if the new loan terms end up saving you money overall. Once you have the rate and loan offers in hand, compare the terms to your existing car loan.

  • Interest rate. The most important factor is the interest rate. A lower rate means more savings over time, especially on longer loans. Calculate the savings between your current loan’s rate and the best new rate offered.
  • Loan term length. Extending your term length can lower the monthly payment, but could cost more overall in interest charges. Stick close to your current term length.
  • Fees. Refinancing costs money upfront in fees. Make sure the savings offset the fees within a reasonable timeframe, such as 1-2 years.
  • Prepayment penalties. Your current loan may have penalties for paying off early. Ask if the new loan has any prepayment penalties.
  • Loan amount. If your current balance is less than the original loan amount, the refinance may be based on the original amount. This restarts the clock unnecessarily.
  • Monthly payments. A lower rate should translate to a lower payment. But extending the term too long reduces the benefit.
  • Total interest paid. In the end, you want to pay less interest overall, even if it costs more upfront in fees.

Run the numbers in an online calculator to estimate the total savings over the life of the new loan. If you save several hundred dollars or more and the fees are low, refinancing is likely a smart move. But small savings may not justify the hassle and expense of refinancing your auto loan.

Step 5: Submit a Loan Application and Get Approved

Let’s walk through the key steps needed to get your car refinance application approved:

  • Gather all required documents – You’ll typically need your driver’s license, proof of auto insurance, recent pay stubs, W-2s, and your current car title or registration. Financial institutions will want to verify your income, employment, and ownership of the car.
  • Complete the loan application – Fill out the application form completely and accurately. List all sources of income. Be sure to read and sign the appropriate disclosures and agreements.
  • Allow the lender to check your credit – A credit check allows lenders to review your credit history and debt-to-income ratio. This helps them assess loan risk and determine the interest rate to offer you.
  • Provide any additional requested items – The lender may request further data like a utility bill to confirm your address, a purchase order for the car, or a record of any major outstanding debts. Supply requested information fully and quickly.
  • Get pre-approved for a specific loan amount – After reviewing your application and documents, the lender will let you know the loan amount, interest rate, and monthly payment you qualify for. This pre-approval locks in these terms.
  • Review and sign the final loan contract – The last step is going over the final loan agreement carefully and then signing it digitally or in person. Then you can get your new lower monthly payments!

Stay organized and respond promptly to lender requests to make the approval process easy. Let me know if you have any other questions!

Step 6: Finalize the Refinancing and Get Your New Lower Payment

You’re almost there! With your new lender selected and loan terms locked in, it’s time to sign on the dotted line and finalize your auto loan refinancing. Follow these last steps to seal the deal:

  • Review all loan documents thoroughly before signing. Make sure the interest rate, loan length, and other key details match what you previously agreed to. Don’t hesitate to ask questions if you have any.
  • Sign loan paperwork and submit any outstanding documentation the lender requires. This may include pay stubs, tax returns, proof of insurance, etc.
  • Make your first new loan payment, if required. Some lenders may ask for your first monthly installment when finalizing.
  • Notify your original auto loan financing company that you have refinanced. Provide details on when they will receive the payoff amount for your old loan. Cease payments to them once refinancing is complete.
  • Celebrate the savings! With your new, lower monthly payment, you’ll have extra cash to save or spend elsewhere. Be sure to put those monthly savings toward other financial goals.

Following these final steps wraps up the refinancing process. You can now drive happily with a more affordable loan payment! As you continue making on-time payments, you’ll also start rebuilding and improving your credit.

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