How to Refinance Your Car Loan

How to Refinance Your Car Loan article image.

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Refinancing a car loan can help you save money by lowering your interest rate. The process involves replacing your current car loan with a new one, typically with a different lender. Your car will act as collateral on your new loan, just as it did on the original loan. Here's how the auto loan refinance process works and what to think about before you apply.

Benefits of Refinancing a Car Loan

There are a few reasons to consider refinancing your car loan with a different lender. Here are some benefits to keep in mind:

  • Lower interest rate: If your credit has improved since you first bought your vehicle or market interest rates have decreased, you may be able to get a lower interest rate than what you have right now.
  • Lower monthly payment: If you keep the same repayment term, a lower interest rate will typically translate into lower monthly payments. If you want to lower your monthly payment even more, though, you may be able to get a new loan with a longer repayment term. This may mean higher interest charges over the life of the loan, but it can be worth it if your monthly budget is tight.
  • Choose to pay off debt sooner: On the flip side, you could also choose a shorter repayment term. Shorter terms typically correspond with lower interest rates, which means you'll save more money and eliminate the debt sooner—although your monthly payments will be more expensive.
  • Get cash from your equity: Some auto lenders offer cash-out refinance loans that allow you to refinance the original loan and get some cash to pay for other expenses. This option is typically limited to people who have a lot of equity in their vehicle.

As you consider these benefits, think about whether refinancing is right for you and take steps to refinance your auto loan.

1. Consider if Refinancing Makes Sense for You

Before you start the application process, it's important to determine if refinancing is the right move for you right now. Here are some factors to consider:

  • Credit requirements: To qualify for the best terms on the new loan, your credit history typically needs to be in great shape. If you're not quite ready, consider waiting and improving your credit score first.
  • Prepayment penalty: Some lenders will charge you a fee if you pay off your auto loan earlier than agreed. Check your loan terms to see if you have a prepayment penalty and how much it'll cost you compared with the potential savings you expect to get from the new loan.
  • Origination fee: Some lenders may charge an upfront fee when you refinance. This fee can vary from lender to lender, but it's important to compare it with the potential savings to see if it's worth the hassle.
  • Length of repayment period: If your new repayment term is longer than your current one and you don't necessarily need the lower payments, it may not be worth it simply because you may end up paying more in interest over the life of the loan.

2. Check Your Credit

Ideally, your credit score will be better now than it was when you received your first auto loan on the car. Check your credit score to see where you stand and if it might make sense to wait and continue making improvements before you apply.

If your credit does need some work, go over your credit reports to get ideas of where you can focus your efforts. You can get your credit report from all three bureaus for free through AnnualCreditReport.com. Your Experian credit report is also available for free directly through Experian.

3. Gather the Necessary Documents for a Loan Application

After you submit your application, you'll typically be required to provide some documents to your new lender. Having this information before you even start the loan process will help it go more smoothly.

Documents that you may be required to share include:

  • Copy of your driver's license
  • Vehicle registration
  • Proof of insurance
  • Proof of income
  • Proof of residence
  • 10-day payoff statement

You'll also typically need to provide the vehicle identification number (VIN), so the lender can determine the car's value.

4. Compare Offers

The best way to maximize your savings is to shop around and compare offers from multiple lenders. Some lenders will allow you to get prequalified before you submit an application, while others may require a full credit check before offering any kind of interest rate information.

The good news is that if you do submit multiple auto loan applications in a short period—try to submit all applications within 14 days—FICO will generally combine all of them into one for purposes of calculating your credit score.

As you compare offers, look at the interest rate, repayment terms, fees and other features that are important to you.

5. Apply for a New Auto Loan

Once you've narrowed down your list of offers to one, submit an application with that lender. Depending on the financial institution, you may be able to do it online, over the phone or even in person.

You'll generally need to provide the same information you shared when you applied for your existing auto loan.

6. Review the Terms and Sign the Contract

Once you've submitted your application, the lender will go through the underwriting process to determine whether you qualify and what your loan terms will be.

Carefully read the fine print to make sure you understand what you're getting yourself into. If you agree, sign the contract, and the lender will pay off your existing loan. The contract will let you know when you'll need to start making payments on the new loan.

Be sure to manage this transition to the new loan carefully to avoid missing payments. Pay attention to all communication from both your old lender and your new one to make sure everything is buttoned up.

How Refinancing a Car Loan Affects Your Credit

When you first apply for a new loan, the hard credit inquiry made by the lender can cause your credit score to temporarily dip by a few points. But over time, your score will rebound, especially if you make all of your payments on time.

Refinancing can also lower the average age of your accounts, which could impact your score negatively. But again, payment history is the most important factor in your FICO® Score , so making your payments on time will do the most good to protect your credit score.

Continue to Monitor Your Credit

After you've been approved to refinance your auto loan, it's still important to keep track of your credit and make adjustments as needed. That way, you'll be ready the next time you need to borrow money.

Experian's credit monitoring tool makes it easy to stay on the right track. You'll get free access to your FICO® Score powered by Experian and your Experian credit report. You'll also get real-time alerts whenever your credit report updates with new inquiries, accounts and personal information.

With your pulse on your credit score, you'll be in a better position to address issues as they arise to maintain good credit.

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