Refinancing your car loan – under the right circumstances – can improve your interest rate, lower your monthly payments, or achieve other financial goals. Here’s how to refinance a car loan, along with some tips on the best times to pursue refinancing.
What Does It Mean to Refinance a Car?
Anytime you refinance, you replace an existing loan with a new, different one. In some cases, you can refinance your car through your current lender, though it’s also common to refinance it through an entirely new lender offering you better interest rates or terms.
The key to making refinancing work is to have a clear understanding of what you hope to achieve. Here are some common goals for refinancing.
- Lowering Your Interest Rate – If your credit score has improved since you obtained your original auto loan, you may now qualify for a loan with a lower interest rate. This means that you’ll pay a lower rate for your monthly premiums and save money over your loan’s lifetime.
- Extending Your Loan Term – If you are struggling to make your monthly payments, extending the life of your loan can reduce the amount of money you pay each month. Be careful: extending your loan term while leaving your interest rate untouched can cause you to pay more in interest over the course of your loan.
- Paying Your Loan Off Faster – If your income has increased, you may want to pay off your car loan earlier. Refinancing with a shorter-term car loan will raise your monthly payments but get you out of debt faster and lower your total interest cost.
- Releasing a Cosigner – If you had poor credit or no credit when you bought your car, you may have had to take on a cosigner to get approved. That arrangement can be a real burden if, for example, your cosigner is shopping for a mortgage and needs to lower their debt-to-income ratio (DTI).
Many lenders won’t allow you to remove a cosigner, but refinancing with your own loan can achieve that goal.
- Escaping a Bad Lender Relationship – You may not be happy with your lender. Customer service may be a problem. Many people fail to shop around for a car loan and end up with a lender they don’t like. Refinancing can get you out of a business relationship with a lender you don’t like.
How Does Refinancing a Car Work?
Refinancing replaces an existing loan with a new one. But what happens when you refinance a car?
Your current auto loan will disappear, replaced by the rates and terms of the new loan.
👉 When you buy a car, the lender pays the dealer, and you pay the lender.
👉 When you refinance, the new lender pays off your old loan, and you pay the new lender.
Use the refinance calculator below to see how much you could save by refinancing your car loan.
Types Of Car Refinancing Loans
There are several ways to refinance a car loan. The type of loan you choose to depends on your needs. Knowing the various types of refinance loans will prepare you for offers you may receive. Understand what lenders are talking about so you can make an informed decision.
- Rate and Term Refinance – This is the most popular type of refinancing. Rate and term refinancing happens when the primary loan is repaid and replaced by a new loan agreement that has a different interest rate and/or loan term.
- Refinance Disbursements – Disbursements are common when the value of the underlying asset securing the loan has increased. The transaction involves getting your excess value out as cash. Expect a higher loan amount and often a higher interest rate. This option provides you with immediate cash while retaining ownership of the car, but it also leaves you with a larger and more expensive loan.
- Consolidation Refinancing – In some instances, a consolidation loan can be an efficient way to refinance a car loan. A consolidated refinance may be used when you receive a single loan at a rate lower than the current average interest rate for several loans you have. This loan consolidates all your debts into one payment with a significantly lower interest rate.
How Soon Can You Refinance a Car Loan After Purchase?
Technically, there’s no rule about how long you must wait to refinance your car loan. However, individual lenders can set their own waiting periods for refinancing a loan.
For example, some lenders will only work with you if you’ve had the loan for at least six months. If you’ve recently purchased a vehicle, you’ll either need to find a lender with little or no waiting period or wait a few months to expand your refinancing options.
How Long Does It Take to Refinance a Car?
Some lenders offer a streamlined approval process, which means it’s possible to receive a new auto loan within 24 hours. Other lenders may have a longer approval process, which can take anywhere from five to 10 business days. As a general rule, you can expect to receive a new car loan in under two weeks.
How Much Does It Cost to Refinance a Car?
Even though refinancing can save you money over your new loan, there are some costs and fees you may incur during the refinancing process itself. These include:
- Transaction Fee: Your new lender may charge a processing or application fee
- Early Termination Fee: Your former lender may penalize you for paying off your loan
- Registration Fee: Some states require you to re-register your vehicle after refinancing
- Title Transfer Fee: Some states charge a fee when the title moves between lenders
Some of these fees will depend on your lender(s). Some lenders may even offer to waive their transaction fee or pay your early termination fee to secure your business, but make sure you ask about these costs upfront.
⚠️ Pay attention to your payment deadlines during this transition process. Late payments — to your old or new loan — can also cause you to rack up late charges.
How Many Times Can You Refinance a Car?
There’s no legal limit to the number of times you refinance your car. However, some lenders may be suspicious of applicants who have already refinanced their cars before.
Additionally, many lenders won’t work with you if you have less than $3,000-$5,000 or two years remaining on your current loan. You may simply not have time to effectively refinance your car more than once. You’ll also be subject to fees and penalties each time, which can reduce the benefits of refinancing.
When Should I Refinance My Car?
When it comes to refinancing car loans, timing is everything.
You’ll need to decide when to refinance to get the most savings. Car loan lengths tend to be relatively short, so the sooner you refinance your loan, the more savings you’ll likely experience.
Here are four key situations in which you should consider refinancing your vehicle.
1. Your Credit Score Has Improved
Lenders rely on your credit score when determining your loan interest rate, meaning you’ll get the best rates and terms on a new loan if your credit score has increased since you received your original auto loan.
Raising your credit score by 100 points can potentially push you from fair credit to good or even excellent credit. This can make a dramatic impact on the interest rate you qualify for.
Use the calculator below to see just how much your credit score impacts the interest rate and the monthly payment on a car loan.
2. You Accepted a Bad Deal on Your Original Loan
Some buyers might simply be the victims of bad loans. When you purchased your original vehicle, you may have taken the first financing option the dealer offered, unaware there were cheaper options available.
Alternatively, it’s possible that consumer interest rates might drop during the lifetime of your loan. If this happens, refinancing can allow you to take advantage of the current interest rate rather than get stuck with the rates that were common when you first received your loan.
3. You Find a Lender With Competitive Interest Rates
The financial industry is highly competitive. Lenders may offer low interest rates in the hopes of securing your business. Even if your credit score or situation hasn’t changed, you may discover that there are lenders who can offer you a better deal on your auto loan.
4. You’re Early in Your Car Loan Term
While some lenders have a waiting period before you can refinance, you’re better off refinancing sooner than later.
For starters, you’ll get the most savings when you refinance a loan with several years’ worth of remaining payments. Additionally, many lenders expect you to have $3,000-$5,000 remaining on your loan to qualify for refinancing.
How Long Should I Wait to Refinance My Car?
Refinancing your car can be a bit of a balancing act. On the one hand, you want to refinance as soon as possible to lower your monthly payments. On the other, you’ll need to wait long enough for your credit score to improve to secure the best rates.
There are many ways to check your credit score for free. You should be aware that many auto lenders use a specific FICO score designed exclusively for auto lenders, but if your regular scores have improved, there’s a good chance that your auto score has as well.
When Not to Refinance Your Car Loan
Does refinancing always guarantee savings? Not necessarily. There may be several scenarios where it doesn’t make sense to pursue refinancing.
- You’re Behind on Your Payments – If you’re behind in your payments on your existing loan, you’re unlikely to find a lender who will work with you for a new loan.
- Your Credit Score Hasn’t Improved – Refinancing makes sense if your credit score has improved. But if your credit has remained the same or even declined, it’s unlikely you’ll receive any benefits from refinancing your vehicle.
- You Have Less Than Two Years Left on the Loan – You’ll get the most savings when you refinance early. If you have two years or less remaining on your existing loan term, you probably won’t see any real savings by refinancing. In fact, some lenders may reject your application entirely if your loan term or balance falls below two years or $3,000. Generally, lenders avoid offering smaller loan amounts because they can’t make as much money from them.
- Your Existing Loan Has a Prepayment Penalty – Some lenders attach a prepayment penalty to your car loan. This penalizes you for paying off your loan early. Competitive lenders may offer to pay this fee for you, but most of the time, you’ll be responsible for this charge. You’ll need to make sure the money you save through refinancing is worth the hit you’ll take from paying off your current loan.
- A New Loan Could Leave You Underwater – Extending your loan term can lower your monthly payments, but it also raises the interest you’ll pay on the car. It’s also possible that your car could depreciate before the loan is fully paid, leaving you “underwater”: owing more than the car is worth. This can make your car difficult to sell or trade in, and it may raise your insurance costs.
How to Refinance a Car Loan
Are you wondering, “what do I need to refinance my car?” You can pursue refinancing by completing the following steps:
1. Consider Your Financial Goals
First, you’ll need to consider if refinancing is right for you. The guidelines listed previously can help you decide whether to pursue refinancing and what to expect depending on your credit score and lender.
2. Check Your Credit
Your FICO score will influence your interest rates. Checking to see if your credit score has improved can give you a good idea of the rate you’ll be offered. If your score hasn’t improved, it may be wiser to wait before pursuing refinancing.
☝️ Remember that there’s a special version of the FICO score used for auto lending – the FICO Auto Score. This is the score that is most likely going to be used to determine your terms and rates. The only place where you can get your FICO Auto Score is MyFICO.
3. Gather the Relevant Documents
To refinance your car loan, you’ll need to have several important documents handy, including:
- Your driver’s license
- Proof of insurance
- Pay stubs or other proof of income
- Your Social Security Number
You’ll also need to provide information about your existing loan, such as:
- Your remaining balance
- Your current monthly payments
- The remaining time on your loan
- Your current interest rate
- Vehicle information (e.g., VIN number)
You’ll present these documents to a lender during the approval process so they can evaluate your application.
4. Compare Lenders
Always shop around. Generally, you’ll want to compare rates between at least three different lenders to ensure you find the best loan terms. Look for early payoff penalties, origination fees, or other crucial details concerning the loan.
Many lenders will let you prequalify with only a soft credit check, which will not affect your credit. This will give you an idea of the terms that you’ll get.
☝️ Remember to compare the terms you’re offered with those of your existing loan. If the terms you are offered achieve your refinancing goals, it makes sense to go ahead. If they don’t, don’t bother!
🏆 Check out our list of the best low-fee refinancing options available nationwide. These options all offer an online application process and APRs well below the current national average: Best Auto Refinance Companies for Low Interest Rates
5. Apply for Financing
Once you decide on a lender, complete the application process and await approval. This generally takes less than two weeks, with some lenders offering approval within 24 hours.
Alternatives to Refinancing an Auto Loan
If refinancing isn’t an option, you might consider one of these alternatives:
- Wait a while and work on improving your credit.
- Sell your vehicle and buy a cheaper alternative.
- Adjust your budget to save money in another area.
Delaying refinancing doesn’t close the door entirely. But if you choose to wait, you’ll need to refinance before your car is too old or your loan term is about to expire.
Refinancing can be an effective strategy for adjusting your monthly budget. Though it carries some risks, many drivers discover that refinancing their vehicle allows them to reallocate money to pay off other debts or save for a future vehicle.
At the same time, refinancing is not the right tool for everyone. If you aren’t getting loan offers that achieve your goals, refinancing probably isn’t the right move for you at this time.