How to Refinance Your Car Loan

Shopping for a better auto loan — and refinancing your current car loan — will probably save you money and can be relatively painless.

Refinancing your auto loan can make sense under several scenarios. For instance, if your credit has recently improved, there’s a good chance you can lower your interest rate and monthly payment. You might also be able to shave some time off of repaying the loan, or go the other way and extend the term if you’re having trouble making your monthly payment.

Applying to refinance often takes less than an hour, and many lenders promise to make a loan decision in minutes. Here are the steps to take to successfully refinance your auto loan.

1. Collect your documents

2. Evaluate your credit history

3. Apply

4. Run the numbers

5. Decide if refinancing makes sense

6. Evaluate the terms of your loan

7. Complete the process

1. Collect your documents

Find a recent payment stub from your current auto loan and make sure you know the following:

1. 1. • Your current monthly payment and the remaining balance.
      • The amount of time left to repay the loan in months, often called the loan term.
      • The interest rate you’re paying.
      • The customer service number of the lender in case you have questions.

Verify that there are no prepayment penalties in your current auto loan contract.

Dig out your original loan contract and verify that there are no prepayment penalties. If you can’t find your contract, don’t worry. The lender’s customer service department can give you the information you need, or even email you a copy of the contract.

You’ll also need the following items to complete loan applications:

1. 1. • Your driver’s license.
      • The vehicle identification number of your car.
      • Pay stubs from your current employer or proof of employment.
      • Your Social Security number.

2. Evaluate your credit history

If you’ve made all your car loan payments on time for a year or more, your credit has probably improved and there’s a good chance you can benefit from a refinance.

Of course, that’s only true if you’ve also kept all your other financial commitments up to date. The proof is in the numbers, so you’ll have to find out where you stand, and you have two options for doing so.

You can pull your own credit report — that’s a history of your credit activity — or check your credit score for free to see if you’ve had any problems, such as late payments. Because you are checking your own credit, this kind of research will not lower your score. However, because each of us has many credit scores, the score you get won’t necessarily tell you exactly what interest rate to expect on your new loan.

Your alternative is to simply apply for a new loan and find out how good your credit is as a result of the application. Which brings us to …

3. Apply

Apply to several car loan refinance companies so you can compare interest rates and find the best offer. The application process doesn’t cost you anything, and you will quickly learn if you qualify for a lower interest rate.

Loan applications made within a 14-day period are typically treated as one inquiry.

One word of warning: Make sure you submit all your loan applications within a 14-day period. Similar queries in this time period are typically grouped together and treated as one, which lessens the impact on your credit score — it will trigger only a small drop, about five points.

4. Run the numbers

Using an auto loan refinance calculator, first enter information about your current loan. Input the original loan amount, your interest rate and the length of the loan in months. Then enter the balance that is remaining to be paid and how many months are left until you pay off the loan.

Use an auto refinance calculator to see how much you can save with a lower interest rate.

Next, enter the number of months you want for the new loan and the interest rate you anticipate getting. You will then see the new — and hopefully lower — monthly payment, how much you will save each month and your total savings over the life of the loan.

This is also a good time to see how much your car is worth. If the balance of the loan is greater than the value of your car, you are upside-down on your loan. Refinancing may not even be possible. 

5. Decide if refinancing makes sense

By now, you should be able to tell if you’ll save money by refinancing your car loan. In some cases, interest rates might also have fallen since you took out your current loan. If that happened, you’re in luck: There might be even greater savings, and it’ll be very clear that refinancing is for you.

In some cases you may see only a small difference, or none at all. And if you are close to the end of your loan, an auto loan refinance may not be worth the hassle.

6. Evaluate the terms of your loan

If you decide to refinance, you can leave the length of your loan unchanged or consider these options:

Pay off the loan more quickly. If you’re used to making loan payments of a certain amount, you may be able to keep the payment about the same but shorten the length of the loan. This saves you money because you’ll pay less interest over the life of the loan.

Take longer to pay the loan. If your budget is stretched and you want a little financial breathing room, you could extend the loan term by a few months or even a year to lower your payments. This isn’t ideal because you’ll pay more interest in the long run. However, it’s better than missing payments and damaging your credit history.

7. Complete the process

If you decide to refinance, complete the application with the lender you choose. You’ll be sent the loan paperwork, and you simply respond to the lender’s requests.

Your new lender will pay off your old loan and you’ll make payments to the new lender.

Here’s a quick overview of what you can expect: You’ll sign new loan documents and a new loan will be created for you, at a new interest rate, with the term length you choose. Your new lender, the refinance company, will pay off your old loan and you’ll begin making payments to your new lender at the lower rate.

While there are many details to take care of, the entire process can be completed in a few hours.