Refinancing an auto loan can be a smart financial move if you’re looking to lower your monthly payments, secure a better interest rate, or adjust the terms of your loan. Whether you’ve built your credit score, interest rates have dropped, or you simply want to free up cash flow, refinancing can provide potential savings over time.
It’s important to understand the auto loan refinancing process, from checking your eligibility to comparing lender offers and submitting an application.
Here, we’ll walk you through the steps to refinance your auto loan, helping you determine if it’s the right choice for your financial situation.
Key Points
• Before initiating the refinancing process, determine your objectives — such as lowering monthly payments, securing a better interest rate, or adjusting the loan term — to guide your search for suitable loan options.
• A higher credit score can enhance your chances of obtaining favorable refinancing terms.
• Having positive equity in your vehicle — meaning it’s worth more than the remaining loan balance — can make you a more attractive candidate to lenders.
• Some auto loans include prepayment penalties, and refinancing may involve additional fees. It’s important to assess these costs to ensure that refinancing will result in overall savings.
• It’s advisable to shop around and compare refinancing offers from various lenders, including your current financial institution, to find the best rates and terms.
What Is Auto Loan Refinancing?
Auto loan refinancing is the process of getting a new loan to pay down the balance of an original car loan. That all takes time, effort, and money (for the loan applications and servicing fees), so you should be sure you have a good reason before you go to the trouble of taking out an auto refinancing loan.
Ideally, your car is holding its resale value. If your car’s value is lower than what you owe on it, refinancing may not be a good option. Older cars could be problematic because no matter how well you’ve maintained it, a car depreciates in value over time.
What’s also important is to understand how to refinance an auto loan. If you extend your loan term or take cash out of your equity, you could wind up owing more than what your car is worth. This is called being upside down on your car loan. If you have to sell the car, you’ll need to pay the lender the difference. Clearly, this is to be avoided.
How to Refinance an Auto Loan
With refinancing, just as with your original deal, there are very particular car loan requirements.
Once your application is approved, your new auto loan provider will pay off your old auto loan or give you the funds to do so and become your auto loan manager. Future payments will go to the lender who handles your refinanced loan.
8 Tips for Refinancing an Auto Loan
These tips on how to refinance a car loan will help you avoid the pitfalls and ensure the process goes smoothly.
1. Compare Your Options
The first step is to list everything you desire from the new loan. It could be a lower monthly payment, a better interest rate, no or low fees, a streamlined application process, or solid customer service.
Now take a look around. You can start with the bank you already use for other services. Some financial institutions offer discounts on interest rates for their customers. Compare the rate offered by your current bank with rates from other lenders. Some people like to get prequalified with at least three lenders for comparison’s sake.
As you survey the refinancing landscape, remember that you may want to prioritize online auto loan refinancing options, since they tend to have fewer fees and competitive rates.
2. Determine When the Right Time Is for You to Refinance Your Car Loan
Figuring out when you should consider refinancing a car is key. People pursue a refinance for all kinds of reasons, including:
To Get a Lower Interest Rate
One of the chief benefits of refinancing a car is that the owner saves money over the life of the loan through a reduced interest rate. Take a vehicle for which the original loan was $25,000 and the refinance loan is $21,000. For a 60-month loan where the interest rate is cut from 7% to 5%, for example, the refinancing could save approximately $6,000 over the life of the loan.
To Shorten the Loan Term
Car owners who are cash flush may shorten their auto loan terms to pay off the car faster, thus saving significant cash with less paid in interest over the life of the loan.
To Extend the Loan Term
Car owners who need some financial breathing room after a job loss, an injury or illness, or a divorce or other family issue can extend the term of the loan to reduce the monthly (but not overall) loan costs.
To Get Some Extra Cash
If you have enough equity in your car, you might be able to take out a refinance loan that’s more than what you owe, known as a cash-out car refinance. But realize that if you opt for this kind of refinancing, you will still have to pay back both the car loan and the extra money.
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3. Get the Paperwork Ready First
Before applying for an auto loan refinance, it’s best to be prepared. Documents you may need include:
Original Auto Loan
Lending institutions will require the original loan paperwork to process a new loan. The original loan paperwork should include the loan amount, the monthly payment, the interest rate, the payoff number, and the up-to-date loan balance.
Vehicle Information
Auto loan providers will also ask for your current vehicle information. This document should include the vehicle’s make, model, year, mileage, and vehicle identification number.
Auto Insurance Paperwork
Make sure you have your car insurance records, including type of insurance and the amount of the insurance included in the policy. Auto lenders won’t make a loan to an uninsured or significantly underinsured vehicle owner. That’s because the lender has a stake in the vehicle, as well. If the car is damaged or totaled, your lender will want to know it was properly insured.
Employment Records
Your auto loan refinancing lender may also ask for proof of income and employment to ensure you have the means to repay the loan.
Personal Information
In addition, a typical auto refinancing loan application likely includes the following:
• Name
• Date of birth
• Email address and phone number
• Address
• Social Security number
• Driver’s license number
• Work status
• Your bank’s name and info
4. Pay Attention to the Details
Before green-lighting an auto loan refinancing deal, you need to know the exact costs. Make sure to nail down how much you’ll save per month and, even more importantly, over the life of the loan. With an older vehicle depreciating in value, refinancing might not be the wisest course.
Watch out for fees. Auto refinancing can carry with it costs ranging from the application fee to title transfer fees, which can eat up savings. Not all lenders will charge significant fees, which is why it’s important to shop around.
5. Prepare for a Hit on Your Credit Score
Refinancing an auto loan, like any other kind of refinance, has the potential to lower your credit score temporarily. This is because it usually requires a hard pull credit check, and also the fact that you are replacing an older loan with a newer one.
When you apply for loans, each lender you apply with will request a credit check that causes a hard inquiry to be entered on your credit report. This can cause a small reduction in your credit score. If you qualify for and accept a loan offer, you’ll typically see another score dip.
Remember, prequalifying for the loan you’re interested in can reduce the number of hard inquiries.
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6. Have a Backup Plan
What if you found a refinance deal you really wanted, applied, but were declined? You could consider applying through a different type of lender. Online lenders, for example, are typically easier to qualify for.
Or you could work on building your credit for a year and then applying again. Aside from the foundation of paying your bills on time, you could pay your credit card balances strategically and dispute the problems on your credit report.
7. Talk to Your Lender
Another key strategy for refinancing a car loan: Speak to your current lender, as you can refinance with the same lender. Not all lenders offer refinancing, however, so find out if yours does.
If they do, you’ll still want to shop around and see what other lenders can offer you. Ideally, you’ll want to go with the lowest interest rate and best terms. Be aware, though, that even though your original lender approved you for a loan the first time around, you may still need to provide them with proof of income. They will also likely check your credit to see if anything has changed. As mentioned, a hard credit check will lower your credit score temporarily.
8. Determine the Value of Your Car
Before going ahead with any refinancing deal, you need to know what your car is worth. You can look up your vehicle’s make, model, and year to get an estimate of its value.
If your car is still fairly new and in good shape, and you still owe quite a bit on your current loan, refinancing could help you save money. But if your auto loan is almost fully paid, refinancing may not make sense.
Typical Requirements to Refinance
It might help you improve your chances of finding a good refinance deal by getting familiar with what the lenders are looking for:
Strong Credit Score
Most lenders will expect a minimum refinance credit score from potential borrowers. Typically, a FICO® credit score of 700 or more will get you the lowest loan rates on an auto refinancing loan. That said, there are lenders that are willing to work with those with low credit scores.
History of On-Time Payments
Potential lenders will look at how well you did with paying off your existing loan. If you’ve failed to make payments on time, that won’t help your cause seeking refinancing.
Improvement in Circumstances
Lenders generally like to see an increase in income or some other quantifiable measuring stick that signals you are worth a lower interest rate.
Pros and Cons of Auto Loan Refinancing
Auto loan financing has advantages and disadvantages, and what’s best for you depends on your specific situation. But as you decide whether to move ahead with the process, weighing the pros and cons of refinancing can help.
Pros
• You may get a lower interest rate, which could save you money.
• Your monthly payment might be lower by either getting a lower rate or extending your loan term. Keep in mind, though, that extending your term may cost you more in interest over the life of the loan.
• You could pay off your loan earlier. If you opt for a shorter loan term than the one you currently have, you could pay off your car sooner.
Cons
• You may need good credit to qualify for the best rates.
• Refinancing may involve a hard credit check, which can temporarily lower your credit score.
• There might be additional fees you have to pay, including prepayment fees and origination fees.
| Pros of Refinancing an Auto Loan | Cons of Refinancing an Auto Loan |
|---|---|
| You may get a lower interest rate | You may need good credit to qualify for the lowest rates |
| Your monthly payment could be lower | There may be a hard credit check, which can lower your credit score temporarily |
| You could pay off your loan earlier | You may need to pay additional fees, including prepayment, title transfer, origination, and application fees |
Determining If You Should Refinance
Once you’ve studied the pros and cons of refinancing, you need to think about what makes the most sense for you at this stage. Is your debt-to-income ratio low? Is your credit history strong? Do you have a good credit score? If so, you may be able to get a lower interest rate, which could be beneficial. Just check to see what fees may be involved with refinancing to make sure you’ll still come out ahead.
In addition, if your car has a high value and you still owe a decent amount on your current loan, refinancing could save you money if you can get a lower interest rate.
But if your credit is not as strong as it could be, or you currently have a significant amount of debt, refinancing might not be the wisest move for you right now. Refinancing also likely won’t make sense if you are almost finished paying off your current loan. In that case, you may want to stick with what you have.
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Applying for Auto Loan Refinancing
If you’re ready to move forward with refinancing, the application process is fairly straightforward. Just follow these steps:
• Shop around. As mentioned, you’ll want to explore your options with different lenders to find the best rates and terms you can qualify for.
• Fill out an official loan application. You’ll need to provide personal information, such as details about your employment and income. You may also need to give the lender pay stubs as verification. In addition, the lender will need your original auto loan, your car insurance information, and the make, model, mileage, and year of your car.
• Wait to see if you’re approved. The lender will review all your information and do a hard credit check. You’ll be notified if you are approved for the loan.
• Review the loan offer carefully. If the loan offer looks good, sign the loan agreement and keep a copy of the paperwork in a safe place. Often, the new lender will take care of paying off your previous auto loan, but you can check with your original lender to make sure. Then, start paying your new loan, per the terms of your loan agreement.
The Takeaway
Refinancing your auto loan can be a strategic financial move to lower your interest rate, reduce monthly payments, or adjust your loan term to better fit your current financial situation.
However, it’s essential to consider factors such as your credit score, the value of your vehicle, and any potential fees associated with refinancing. By thoroughly evaluating your options and understanding the implications, you can make an informed decision that aligns with your financial goals.
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
What does it mean to refinance an auto loan?
When you refinance an auto loan, you are applying for a new auto loan and using that new loan to pay off your old auto loan. This gives you a new interest rate, a new loan agreement, and a new loan term.
How do you refinance an auto loan?
To refinance an auto loan, check your credit score, compare lender offers, and gather necessary documents like proof of income and vehicle details. Apply with a lender offering better terms, and if approved, use the new loan to pay off the existing one. Start making payments under the new agreement.
When might you consider refinancing your car loan?
A car loan refinance makes the most sense if you have a good credit score and, ideally, a higher income or some other positive marker than when you got your original car loan. If so, you are more likely to qualify for a lower interest rate and better terms.
Can auto loan refinancing hurt your credit?
When you apply for an auto loan refinance, the lender typically does a hard credit pull, which can lower your credit score temporarily. Your score generally recovers within several months.
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