How to Refinance Your Car Loan (Step-by-Step)

Written by Kim PinnelliReviewed by Anders Skagerberg, CFP®Updated: 15th Apr 2022
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If you want a lower interest rate or a shorter term, refinancing a car loan may make sense. It’s not as hard as it sounds, and with the right platform, you can shop around for the best deal.

Lowering your interest rate and/or term can save you quite a bit of money and help you own the car faster.

Here’s how to refinance a car loan.

How to Refinance a Car Loan (Step-by-Step)

#1. Decide If Refinancing Your Car Loan Makes Sense

Refinancing doesn’t always make sense. If you’ll extend the term and the interest rate is only slightly lower, for example, you’ll pay more over the life of the loan.

Make sure you can afford a shorter term and that you’ll get a lower interest rate. Next, look at the fees. Is there a prepayment penalty? What does the lender charge for you to refinance? Figure that into the total loan cost.

Finally, look at the bottom line. What’s the total cost of interest over the loan term plus fees? Is it less than what’s left on your existing loan? If not, or there’s not much of a difference, it may not make sense to refinance.

If it does make sense, move onto step 2!

#2. Collect Necessary Documents

To refinance your car loan, you must identify who you are and that you can afford the loan. Just like when you bought the car, you’ll need:

Personal Information

You must provide information about your identification, including your Social Security number and birthdate. Most lenders also want a copy of your driver’s license.

Proof of Income

To prove you can afford the loan, you must provide proof of income with paystubs (some borrowers may need to provide their tax returns too).

Current Auto Loan Information

Get as much information on your current loan as possible, including the interest rate, outstanding balance, and bank name for the new lender.

Vehicle Information

Banks need to know what they’re lending money on to determine if there’s enough collateral. You must provide the make, model, and year of your car. You’ll also need to provide the car’s VIN and mileage.

Proof of Auto Insurance

No bank will lend you money without proof of auto insurance. You must prove you have current and valid insurance before they’ll fund the loan.

#3. Evaluate Your Car’s Loan-to-Value Ratio

Next, figure out if you’re ‘upside down’ on your loan. This means you owe more than the car’s value. If that’s the case, you won’t be able to refinance.

You can get the fair market value of your car using Kelley Blue Book, which is what most lenders use too.

If you don’t owe more than the car is worth and you have decent equity in it, you’ll have a higher chance of securing the loan.

#4. Review Your Credit Score

Before you apply for a car refinance loan, review your credit score. You get free access to your credit reports here, but they don’t include your credit score.

Look over your reports and determine if you have any late payments, collections, or overextended credit you should take care of first.

Once you fix your credit history, check with your bank where you have your checking account or any credit card companies you work with and see if they offer free credit score access.

Most offer access to your VantageScore, which may not be exactly what lenders see, but it will be close and show you where you stand.

#5. Shop Around for Competitive Auto Loan Refinance Rates

Since you’re refinancing to save money, shop around to get the best auto loan rates. You don’t have to use your existing lender; you can refinance with any lender. We suggest getting a quote from your existing lender plus at least 3 others.

If you don’t want to be bothered with multiple applications and dealing with various lenders, use an auto loan refinancing marketplaces, such as Caribou or Auto Approve.

You only need to complete one application with them, yet they match you up with several lenders, making it easy to comparison shop.

#6. Evaluate Loan Terms & Fees

When you look at your loan options, don’t focus on the interest rate alone. Look at the big picture. What are the loan terms? How does it compare to your current loan?

Are you adding time to the loan or decreasing the term? The shorter the term, the more money you’ll save on interest, but only take a term you can afford.

Next, look at the fees. How much does the loan cost? If it’s too much, it may not make sense to refinance.

Add the fees to the loan’s total cost (total interest paid over the life of the loan) and compare it to what’s left on your current loan. If it’s not less, then it’s not worth refinancing

#7. Apply for New Refinanced Auto Loan

Once you find the right loan, apply for it with the lender. Even if you went through an auto refinance marketplace, you’ll work directly with the lender to get the loan.

The lender will tell you what documents they need and what else is necessary to close the loan.

#8. Pay Off Your Old Loan & Start Making New Monthly Payments

Once you close your new loan, the lender will use the funds to pay off the old loan. You’ll then make payments to the new lender according to their instructions.

Many lenders offer an autopay discount, so ask your lender if they offer this. You could lower your interest rate by 0.25% – 0.5% for setting up regular payments.

>> Learn More: Best Auto Loan Refinancing Lenders

A Guide to Refinancing Your Car Loan

When Should You Refinance Your Car Loan?

There’s no right or wrong time to refinance your car loan. It depends on your circumstances and the current market but consider refinancing if any of the following are true.

#1. Your Credit Score Improved

If you had ‘okay’ credit when you bought your car, but you’ve since improved it, you may qualify for a better auto loan today.

A lower interest rate means you save more money monthly and over the life of the loan. The less interest you pay, the less the loan costs over your lifetime.

#2. Change to A New Loan Term

If you make more money now or pay off other loans and have more room in your budget for a shorter term (larger payment), consider refinancing.

A shorter term means you’ll pay the loan off faster. Even though your monthly payments will increase, you’ll pay less interest over the life of the loan, saving you money overall.

#3. Auto Loan Rates Are Down

If you got your financing from a car dealer or you bought when interest rates were high, you should refinance if rates fall.

Find a loan with minimal costs and without a prepayment penalty, so you get the best deal.

#4. Your Current Auto Lender Isn’t Good

If your current auto lender has bad customer service, doesn’t service your loan right, or is impossible to get ahold of, you should refinance to get a new lender.

Do your research before you pick another lender, though. Make sure people like the lender you’re applying with so you don’t end up in the same situation.

#5. Positive Equity

Don’t refinance if you’re upside down (you owe more than the car is worth). No lender will approve your loan.

But, if you have positive equity – you owe less than the car is worth, you have leverage. Lenders want loans like yours because there is collateral in the loan. If you default, the lender could sell your car and make their money back.

Is Refinancing Your Auto Loan Worth It?

Refinancing your auto loan can be worth it if you do your research. Don’t refinance just to refinance. Make sure it makes financial sense.

Look at how much money you’ll save monthly. Is it enough to pay the costs to refinance? How much will you save per year? Is it enough to warrant refinancing?

If you’re going to take a refinance loan with a prepayment penalty or that doesn’t save you much money, it’s generally not worth it, especially if it will stretch out your term.

But, if you can save money monthly and over the life of the loan, it can be worth it.

Is It Easy to Refinance a Car Loan?

Just like when you bought your car, the difficulty varies based on your qualifying factors. But lenders also look at the car.

Some lenders only refinance cars of a certain age or mileage. If your car is too old or has too many miles, they may not approve the refinance.

Using an auto loan refinance marketplace helps increase your chances of finding a lender. With one application, you can apply with multiple lenders to find the loan that’s right for you.

Does Refinancing a Car Hurt Your Credit?

Refinancing may drop your credit score initially, but it won’t hurt it too much with on-time payments. The largest hit is the inquiry.

Each time a lender pulls your credit, it hits your credit score a few points. If you comparison shop, do it within a short period (3 weeks or so).

The credit bureaus treat this as one inquiry since they recognize the need to shop around.

Your credit score may drop slightly with the new loan, too, since it brings down your average credit age. Both of these ‘hits’ are temporary, and if you make your payments on time, it will bounce right back up.

Do You Have to Put Money Down When You Refinance a Car?

No, you don’t need a down payment when you refinance a car. Instead, you need equity. This is the difference between the car’s value and your loan amount. The more equity you have, the better the terms a lender may offer.

Should you Refinance your Car Loan?

Look at the big picture and see what you have to gain from refinancing your car loan. Will you save money? Did your credit score improve?

If you decide refinancing is right, shop around for the best deal. Using an online auto loan refinance marketplace is the easiest way. Here are a few worth considering:

You’ll get multiple offers from one soft credit pull and can choose the loan that’s right for you with little effort.

Bottom Line: How to Refinance Car Loan

Refinancing your car loan doesn’t have to be hard. Online lenders and marketplaces take the pain and hassle out of the process.

Review your credit score, shop around for the best rate, and refinance your car loan. All in all, this will lower your monthly payments and will free you from a bad auto loan deal.

Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.