How to Refinance a Car Loan
When it comes to car buying, ever find yourself so thrilled to get the keys to your new vehicle that you didn’t read all of the fine print when signing on the dotted line of the loan paperwork? We get it. TL; DR. Still, the next thing you know, you’re looking into how to refinance a car loan.
Perhaps you realized you accepted a higher-than-average interest rate, or you’re feeling buyer’s remorse each time you submit that substantial monthly payment. Or maybe you simply want to see if you can find more favorable terms. If these factors have you wondering, “Can I refinance my car loan?” Don’t worry! The answer is almost always yes. You can take steps to refinance your car loan to pay less each month or even learn how to pay off a car loan faster through refinancing.
Away from the high-pressure environment of a car dealership, you can also check out avenues you didn’t consider pursuing the first time. For example, did you know credit union car loan rates are often lower and include more favorable terms than other car loan providers?
How to Refinance a Car Loan
Refinancing a car loan is not all that different from shopping car loan rates the first time around. If your current loan comes with a less-than-favorable interest rate, it may be worth refinancing to bring down your monthly payment.
Consider the following steps to see if refinancing a car loan is the right move, how to go about refinancing, and what’s needed to secure a great rate. If you went through the car dealership for your loan the first time, be sure to look at all available car loan options this time around. Remember, your local credit union is likely to offer automobile loans with the most competitive interest rates. As a result, you could find it’s the best option for refinancing your car.
When to Consider a Car Loan Refinance
Many car buyers don’t have the time or resources to shop around for a better rate. As a result, they get stuck with a higher interest rate offered through a dealership loan just because it’s what was available at the time. If now you cannot make those payments (or you’d just like some extra cash to put toward your daily latte habit), you should consider refinancing options to lower your expenses. It may also be beneficial to refinance your car loan because interest rates have dropped or you’ve improved your credit score. The better your credit score, the more likely you will secure a better loan offer.
Keep in mind that timing is important. Technically, you can refinance a car loan any time after buying your vehicle. But you may want to slow your roll. While you may be eager to refinance your car loan, waiting six months to a year after your initial car purchase will give your credit score time to rebuild. This is because many people experience an initial drop in their credit score after a major purchase until they’ve established a proven track record of on-time payments.
When Not to Refinance Your Car Loan
While getting lower payments through a refinanced car loan can seem like a no-brainer, sometimes it’s just not the right move. For instance, you would never want to refinance at a higher rate than your original loan. Refinancing may also come with hidden costs, and some cars don’t meet the qualifications for easy refinancing.
Here are some top situations when refinancing doesn’t pay off:
- Older vehicles. If your car is older or has a lot of miles, it may not qualify for refinancing. In this instance, you could still consider taking out a personal loan with lower interest rates and then use the personal loan to pay off the higher interest rate car loan.
- The finish line is in sight. If your original loan is nearly paid off, you may be better off sticking it out.
- Potential penalties. Often people want to know how to pay off a car loan faster. However, though it might seem counterintuitive, sometimes car loans come with prepayment penalties — meaning you could incur extra expenses by refinancing or paying too quickly. Take a close look at your existing loan’s terms.
- Other planned purchases. If you intend to apply for additional credit in the future, you may want to postpone your car loan refinancing. Refinancing to save a few dollars a month now may negatively impact your future credit score when seeking another type of loan.
5 Steps to Refinance a Car LoanOnce you’re confident it’s the right move to make, refinancing your car loan is easy and similar to the steps you took to secure your initial loan.
1. Check your credit score
Checking your most up-to-date credit score will help you determine if now is the right time to refinance your car loan. You can check it for free online through many financial institutions or credit card companies, or with each of the three national credit bureaus (Equifax, Experian, and Transunion) in one convenient spot.
If you have a better score than you did at the time of your initial loan, and interest rates are lower than what you are paying, it may be a good decision to move forward with refinancing for lower monthly payments.
2. Review your current loan
This is where it pays to read the fine print! As mentioned, some car loans have penalties for refinancing and early payments. Or, the lender requires you to pay the remaining interest upfront before refinancing. If your loan checks either of these boxes, it may make more financial sense to stick with your current loan.
You’ll also want to know if your original loan was frontloaded, meaning you’ve been paying the interest upfront. Depending on how long you’ve already been making these interest-heavy payments, a refinance may not save you enough money to be worth it.
Be sure to factor in any potential penalties and other fees — for example, some states require that new loans incur new title and registration fees — to ensure you’d still be saving money with a switch. Then, you can feel confident moving to the next step.
3. Determine your vehicle's worth
Knowing your ride’s market value will help determine if lenders will be willing to refinance. You can check a source like Kelley Blue Book or even have the vehicle privately appraised by an approved specialist in your state.
Your vehicle’s overall condition and total mileage — even its paint color — will be key to judging the car’s current value. If it turns out your vehicle is worth less than what you owe, refinancing may be difficult.
4. Shop loan rates
For this step, it’s important to explore all of your options and even consider checking with the same lender that provided your original loan. If they are willing to work with you and offer a favorable rate, it could save you some paperwork. More likely, though, you will find a better rate with a different lender, such as your local credit union.
Compare each loan offering's annual percentage rates, loan terms, monthly payments, and potential savings. You’ll find credit union car loan rates are often lower than the dealership, online lenders, or other financial institutions because credit unions are member-owned, not-for-profit organizations with a community focus.
5. Know your goals and apply
If your research shows the opportunity for better rates, take your time reviewing your options and be clear about your refinancing goals. Consider, is your overall refinancing goal to lower your monthly rate, pay off your loan faster, or pay less overall? Your answer will determine the right path for you.
Say you intend to pay off the car loan faster. First, make sure the length of your new loan is shorter than the original. You'll also want to consider paying extra toward the loan's principal (the money you borrow from the lender, minus accumulated interest) each month to speed things up further. Or, if you're focused on lowering your monthly payment, you may find it's not worth it if you ultimately end up paying more for the vehicle over an extended repayment period.
When you’ve got your goals clear and are ready to move forward with the refinance, get preapproval from your new lender. You will need standard documentation such as identification, insurance information, pay stubs, and vehicle information (make, model, mileage, vehicle identification number). Once approved, make sure you submit the proper paperwork with both your new and old lenders. Then, follow up to ensure your new lender properly paid off your original loan and everything is set for your monthly payments to the new lender.
Finally, sit back and enjoy your lower monthly car payment!
Further Resources on How to Refinance a Car Loan
Finding that you need some more help with the refinance process? Check out these resources to help jumpstart your car refinancing journey.
- Get another opinion on your car’s current worth through Edmunds.
- Learn how your car loan rate can factor into a balanced budget with help from Consumer.gov.
- Think ahead by taking a look at Kelley Blue Book’s rating of cars with the best resale value.