Auto loan refinancing involves replacing your current car loan with a new one — ideally with more favorable terms. Depending on your financial profile, refinancing could qualify you for a lower interest rate, which may reduce your monthly payments and help you save money over the life of the loan.
Key Points
• Refinancing means replacing your existing car loan with a new one — ideally at a lower interest rate or with better terms — to save on interest and/or reduce monthly payments.
• By securing a lower rate through refinancing, borrowers can decrease their monthly payments and save money over the life of the loan, especially if they maintain or shorten their loan term.
• If your credit is limited or poor, adding a creditworthy cosigner can improve your chances of approval and help you qualify for more favorable rates and terms.
• An auto loan refinance calculator can help you decide if refinancing your auto loan makes sense for you.
• While you can refinance with your current lender for convenience, comparing offers from multiple lenders — including those you don’t already bank with — ensures you find the best interest rates and fees.
How Car Loan Refinancing Works
When you refinance, you’re essentially negotiating a new agreement that could offer better rates or a more manageable payment schedule. Comparing lenders is key, as it allows you to find the most competitive offers. The best refinance option should match your financial goals, whether that’s minimizing interest, lowering your monthly bill, or both.
Here’s an example of what an auto refinance may look like:
Sam took out a car loan in late 2023. At the time, Sam had a low income and credit score, plus a fair amount of debt. This financial situation resulted in an interest rate of 16.56% for a subprime borrower on a used car — higher than the national average of 10.79% for used cars back then.
Since purchasing the car, Sam’s income has risen, his debt has shrunk, and he’s built his credit score. As a result, Sam thinks he may qualify for better interest rates today.
Seeking the lowest auto refinance rates, Sam decides to investigate car loan refinancing by:
1. Setting goals for the new loan, such as an improved auto loan refinance rate.
2. Researching online and brick-and-mortar lenders, including his current lender (refinancing car loans with the same lender is possible), and inquiring about possible loan terms.
3. Self-reporting information to preferred lenders to see what prequalifying auto refinance rates look like (if available).
4. Reading the fine print for preferred potential lenders to make sure all terms are clear.
5. Applying to refinance the car loan with a preferred lender.
Given Sam’s income, debt-to-income ratio (DTI), and credit score improvements, a lender may offer him a loan with more favorable auto refinance rates and terms.
When to Think About Refinancing a Car Loan
• Your credit score or debt-to-income ratio have greatly improved
• Car loan interest rates have dropped in general
• You realize your current loan is not right for you
• You want to change the term of your loan
• You have a subprime auto loan and want to explore refinancing car loans with a cosigner
• You need a lower monthly payment
Required Information for Refinancing a Car Loan
When you apply to refinance a car loan with a new lender, you may need to provide information proving your identity and car ownership. Some of these documents and details may include:
• Driver’s license
• Proof of residence (e.g., a utility bill)
• Income verification (e.g., a pay stub)
• Car registration details
• Your Social Security number
• Your credit score (via a credit check)
• Insurance documents
• 10-day payoff amount from the current lender
• Vehicle identification number (VIN)
• Limited power of attorney allowing vehicle title modification
• Evidence of consistent, up-to-date payments on your current loan
This list is relatively extensive and lenders may require all of this information. Some auto refinance lenders may initially ask for a few documents and eventually request additional information to verify details.
The best auto refinance companies may deny your application if you cannot provide adequate proof of identity or proof of current financing. Applicants with excellent credit and sufficient income may qualify for the lowest auto refinance rates.
Recommended: Auto Loan Refinance Calculator
Tips for Comparing Car Loan Refinance Rates
• Check your credit score – Lenders base rates heavily on your credit, so knowing your score helps set expectations.
• Shop around – Compare offers from banks, credit unions, and online lenders to find the most competitive rates.
• Look at the APR, not just the interest rate – The APR includes fees and gives a clearer picture of the total loan cost.
• Compare loan terms – A longer term may lower your monthly payment but increase total interest paid.
• Ask about fees – Look out for origination, prepayment, or application fees that could impact your savings.
• Use a refinance calculator – Estimate your monthly payments and total savings to see which offer is best.
• Evaluate lender reputation – Read reviews and check customer service ratings before choosing a lender.
• Know your vehicle’s value – Some lenders won’t refinance older cars or those with high mileage.
Refinance Your Car Loan and Lower Your Monthly Payments
There are pros and cons of refinancing a car loan. Every situation and every lender is different. The best company to refinance auto loan debt for some borrowers may not be the best auto loan refinance company for you. This is why shopping around and comparing used car refinance rates is so important.
Potential benefits of refinancing an auto loan include:
• Lower interest rates: If your financial and credit situations have significantly improved since you took out the original loan, you could qualify for a lower interest rate. As mentioned earlier, applicants with excellent credit and sufficient income may get approved for the lowest car refinance rates.
• Budget-friendly monthly payments: Refinancing your loan may result in lower payments each month if you decide to extend your loan term. Keep in mind, though, that by extending your loan term, you’ll typically pay more in interest over the life of the loan.
• Cash for other expenses: If you have positive equity (i.e., your car is worth more than your current loan amount), you may be able to borrow against that equity with cash-out auto refinancing. This means you can take out more than what you currently owe on your car and use that additional loan money to pay for other expenses.
Potential downsides of refinancing an auto loan include:
• Lowering your credit score: A lender may pull a hard credit check before making an official auto loan refinancing offer. The hard credit check may hurt your credit score, whether or not you accept an offer.
• Paying more in the long run: While monthly payments may be more budget-friendly in the short term, refinancing a car may entail a longer loan term. As a result, lower monthly payments can result in paying more in interest over the life of the loan.
• Possible debt-to-income impact: Cash-out auto refinancing increases your debt burden, which can negatively impact your debt-to-income ratio and make it harder for you to qualify for other lending products.
The Takeaway
If your financial situation has improved since taking out your car loan, you could qualify for a better rate. Building a credit score, landing a better job, or paying off some other debts may cause a lender to consider an applicant as less of a risk than when they financed a car originally. Qualifying for a more favorable rate now could mean saving money over the life of the loan.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Can I refinance a car loan with bad credit?
Yes, refinancing an auto loan with bad credit is possible, but it may be difficult. Lenders typically handle auto refinancing on a case-by-case basis. You may be able to refinance a car loan with bad credit if you have a positive track record of making payments on your current loan or have a creditworthy cosigner. If you’re considering refinancing and are coming up empty-handed, talk to your current lender. They may be open to discussing options.
How do I know which lender is the best for my auto loan refinance?
To find the best lender for your auto loan refinance, compare interest rates, loan terms, fees, and customer service reviews. Use online tools and calculators to estimate savings. A good lender offers transparency, flexibility, and terms that align with your financial goals, such as lowering your rate or monthly payments.
Does checking my auto refinance rate hurt my credit score?
Checking your auto refinance rate with a soft credit inquiry won’t hurt your credit score. However, submitting a full loan application triggers a hard inquiry, which may cause a slight, temporary dip in your score. Comparing rates within a short time frame can help minimize the impact of multiple hard inquiries.
Can I refinance with a cosigner?
Yes, some companies allow auto refinancing with a cosigner. Some lenders may also allow qualified individuals to co-borrow. A creditworthy cosigner or co-borrower can help you get approved for better refinance car loan rates.
Who has the best auto refinance rates?
The best auto refinance rates typically come from credit unions, online lenders, and banks offering competitive APRs to qualified borrowers. Rates vary based on credit score, loan term, and vehicle details. Shopping around and comparing offers helps identify the most favorable rate for your financial situation and refinancing goals.
Can I qualify for auto loan refinancing at a lower interest rate?
Auto refinance applicants may need higher income, better credit scores, or a much lower debt-to-income ratio than they had when taking out their initial loan to potentially qualify for lower rates. That said, qualifying for a lower car loan refinancing rate is never guaranteed, no matter how much those factors may have changed in your favor.
What happens if I extend my car loan term?
Extending your car loan term can lower your monthly payments, making them more manageable. However, you may pay more in total interest over the life of the loan. It can also increase the risk of being upside-down on your loan, where you owe more than the car’s current value.
Photo credit: iStock/tomertu
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