How Does Auto Loan Refinancing Work?
Auto loan refinancing is just like refinancing your mortgage. You take out a new loan to replace your existing car loan. The new loan pays off the old loan and potentially saves you money or shortens your term.
You must qualify for the loan, just like you would a loan to purchase a car. Lenders will pull your credit, ask for proof of your income and possibly other qualifying documentation to ensure you are a good risk and can afford the loan.
When Should You Refinance Your Car Loan?
If you improved your credit score, your income increased, or you can afford a larger payment (shorter-term), refinancing your car loan may be a good idea.
Always look at the big picture, though. Don’t assume a lower payment is better – look at the bottom line. How much does the loan cost you overall? Include the origination fee and all interest you’ll pay on the loan.
If you are having trouble affording your car loan, you may end up paying more interest over the life of the loan if you extend the term, but sometimes it’s what’s needed to make the payment affordable. Look at all options before deciding.
How to Refinance a Car (Step-by-Step)
#1. Make Sure You Are Current on Payments & Not Upside-Down
Lenders want the best qualifying factors, and it starts with your payment history. When they pull your credit, they’ll first look at your credit score. Next, they’ll look at your car payment history.
If you don’t make your car payments on time, most lenders won’t consider you for a refinance.
The only exception to the rule is if you’re looking for a loan with a longer-term (smaller payment). You’ll still need decent credit to qualify, but the payment history may not be as important.
Also, make sure you aren’t upside down on the loan. This means you owe more than the car is worth. If you were to sell your car today, you wouldn’t make enough money to pay off the loan and would have to dig into your bank account to pay it off.
If you’re upside down, most lenders won’t lend to you because there’s not enough collateral in the loan. Refinance before your car’s value drops, and it’s impossible to refinance.
#2. Review Your Credit Score
Your credit score is the first thing most lenders look at. If you don’t know your credit score, you can do one of three things:
- Sign up for free credit score reporting from your bank or credit card company (most offer free access today)
- Sign up for a free Experian account and check your credit score
- Sign up for Credit Karma and check your credit scores
You can also get free access to your credit report here. This won’t give you a credit score, but you can see your credit history.
Your credit history is what makes up your credit score, so if you have late payments, overextended credit, or collections, find out what they are and do your best to fix them, so your credit score improves.
You don’t need perfect credit to qualify for an auto loan refinance, but good credit always gets the best interest rates.
>> More: How to Refinance Your Auto Loan
#3. Shop Around for the Best Auto Loan Refinance Rate
Take advantage of the opportunity to shop around for the best auto loan rates. Today you don’t have to apply with multiple lenders – you can try one of the marketplaces discussed above and shop around with just one loan application.
Most marketplaces do a soft credit pull, so it doesn’t hurt your credit to check your rates and see what offers you may receive.
Compare two to three auto loan refinance rates side-by-side, looking at the term, interest rate, and total loan cost before choosing a loan.
#4. Double Check Car Lender Requirements
Once you choose a lender, make sure you’re clear on the car lender requirements. Each lender has different requirements, including the type of car, make/model of the car, car’s age, minimum monthly income, and whether they allow a co-applicant.
Before you agree to go with an offer, make sure you’re certain. Once you accept the offer, the lender does a hard credit pull which means you’ll have an inquiry on your credit report.
It only knocks a few points off your credit score, but it’s best to be sure you are ready to move on with a lender before allowing the hard pull.
#5. Ensure Car Title Is Clear
The lender will make sure your car title is clear, meaning you don’t have any liens on it. If the title isn’t clear, you won’t be able to refinance your loan until you clear it up.
#6. Submit Paperwork
Provide the lender with the required paperwork. The faster you provide the documentation, the faster you can refinance.
Usually, once you submit the paperwork, it takes a few days, and you’ll have your new loan. If the underwriter asks for more documentation, provide it quickly to get your loan refinanced faster.
#7. Create A Financial Game Plan to Make You Keep Making Your Payments On-Time
Before you close on the loan, make sure you can afford it. Create your budget and make sure the new car payment fits well, especially if you shortened the term and have a higher car payment.
A shorter-term is a great way to save money, but you’ll accrue more interest and hurt your credit if you can’t make the payments on time.
How to Choose a Good Auto Refinance Lender: What to Look For
Here are things consumers need to consider when choosing an Auto Loan Refinance Lender. These factors will help narrow down your search and secure the best auto loan refinance rate.
A lower APR means less cost to borrow money. If you’re trying to lower your payments and/or save money on your loan, look for the lowest APR.
Don’t be fooled by extremely low APRs, though. Look for origination fees, too and make sure the low rate is worth the fee. Ask the lender to see the rate without the origination fee so you can compare.
Many loan marketplaces like we discussed above don’t charge any fees, but the lender who underwrites your loan likely will.
Look at the big picture, including all upfront fees and any prepayment fees the lender charges. Read the fine print and look for the loan with the lowest fees.
Attractive Loan Amounts
It doesn’t make sense to refinance with a lender that doesn’t offer the loan amount you need. Look at your outstanding loan amount and find a lender that offers loan amounts within the amount you need.
Loan Terms Offered
The shorter the loan term, the more money you’ll save in the long run. However, a shorter term means a higher payment which can make it hard to afford. Look at the big picture and compare your options.
If you can afford the shortest term, you’ll save the most money, but sometimes a slightly longer-term is a safer bet if you aren’t sure about affordability.
Legit lenders should be transparent with their APRS, fees, and fine print online. If you find it hard to get details because the lender keeps everything under wraps and makes you call to talk to someone to find out details, they aren’t very transparent and could be hiding something.
Strong Customer Support
Customer support is the key to a good loan. If you have trouble making payments, need help making a payment, or want to know how to pay your loan off, you need a responsive customer service team.
Read reviews about a company’s customer service and even test it out yourself before taking the loan to see what you think.
The internet makes it easy to find out a company’s credibility. Read reviews, check the Better Business Bureau, and look on marketplace websites to see what others have to say about a company.
You’ll know right away if they are legit or not by the responses people have about it.
Favor Auto Refinance Marketplaces
Auto refinance marketplaces are the best way to get the best loan. You complete one application and receive multiple offers.
This allows you the chance to look at your options, compare different loans side-by-side, and decide which one is right for you.
Pros and Cons of Auto Refinancing
- It’s possible to secure a lower interest rate
- You may save money on interest over the life of the loan
- You may be able to shorten the loan’s term
- You can extend the term if you can’t afford your current payment
- It costs money to refinance
- You may not qualify for the best/lowest interest rates
- Not all cars are eligible
Auto Refinance Companies FAQs
Can I Refinance My Car Loan with Bad Credit?
You may be able to refinance your car loan with bad credit but watch the rates and fees. Lenders often charge much higher interest rates and fees to make up for the risk of lending to someone with bad credit.
Can I Refinance If I Am Upside-Down on My Car Loan?
Most lenders will not refinance your car loan if you are upside down (owe more than the car is worth). The car is the collateral for the loan, and if the value isn’t high enough, lenders can’t lend you money.
What Will Refinancing My Auto Loan Cost Me?
Each lender charges different fees. Some charge origination fees while others don’t. The better your credit score and qualifying factors, the less the loan may cost you.
Can I Refinance More than I Owe on My Car?
Very few lenders will lend you more money than you owe on your car. If they do, it’s only for borrowers who have enough value in their car to leave room for cash out. The lender still uses your car as collateral for the loan.
Can I Refinance My Car Loan Through the Same Lender?
Yes, you can refinance your car loan through your same lender, but it’s in your best interest to shop around and see what other offers are out there for you.
Does Auto Refinancing Hurt Your Credit?
Auto refinancing may hurt your credit initially, but it won’t last long. Any time you take out a new loan, your credit score falls because of the new credit.
It lowers your credit age and puts an inquiry on your credit report. As you pay the loan on time, though, your credit score may increase even higher than it was before.
>> More: How Much Will a Car Loan Drop My Credit Score?
Can I Transfer My Car Loan to Another Person?
You can only transfer your car loan to another person if the bank approves it. Just like you had to qualify for the loan, so will the person you transfer the loan to, and the bank must approve it.
What is the Downside of Refinancing a Car?
If you refinance your car and take out a longer loan, it will take longer to pay off the loan, plus you’ll pay more interest over the loan’s term.
You should only refinance if you can afford the same or shorter term, and you’ll save money by refinancing. Don’t forget to figure in the fees to refinance to make sure it makes sense.
Summary: Best Auto Loan Refinance Companies
- Caribou: Best Overall Auto Loan Refinance Marketplace
- Tresl: Runner Up for Competitive Auto Refinance Rates
- RefiJet: Best for Comparing Auto Refinance Rates
- Autopay: Best for Comparing Auto Refinance Rates + Offers
- RateGenius: Best for Low Rates + Online Experience
- Ally Clearlane: Best for Direct Lender Auto Refinance
- Gravity Lending: Best for Comparing Auto Refinance Rates
- OpenRoad: Best for Online Application Experience + Low Rates
- Auto Credit Express: Best Bad Credit Auto Loan Refinance Rates
- LendingClub Auto Refinance: Best for Peer-to-Peer Auto Refinance Opportunities
- Auto Approve: Best for Comparing Auto Refinance Rates
Bottom Line: Best Auto Loan Refinance Rates
Shop around to get the best deal with refinancing your car loan. You have many options, especially if you have great credit, but an auto loan marketplace is the best way to shop around and get the best deal on your car loan.
To select the best auto loan refinance lenders, we evaluated 25+ companies across ten critical factors. We reviewed and analyzed current auto rates, lender availability, loan terms, total loan amounts, income and credit score requirements, vehicle restrictions, reputation, and security. Analysts value transparency, honesty, and advanced technology, allowing consumers to easily apply for auto refinance on their mobile device or computer and find pertinent information. We also evaluated the online reputation of each company by reviewing third-party websites, such as Trustpilot, Google Reviews, Consumer Financial Protection Bureau, Better Business Bureau, and Federal Trade Commission. Read our editorial guidelines and auto refinance rating methodologies for more information about the integrity, accuracy, and honesty of our review process.