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How Auto Loan Refinancing Works

Last updated 03/15/2024 by

Julie Pimentel
Refinancing your car loan could make a lot of sense, but only under certain circumstances. Say your financial situation has changed and you are struggling to make payments but still need a vehicle to get to work and earn money. Or perhaps you realize your original loan from the auto dealer wasn’t such a great deal.
Refinancing your auto loan can be a quick, easy and painless process. Here are some steps to take and options to consider.
Refinancing your car’s auto loan not only makes a lot of sense but saves a considerable amount of money for anyone with a car loan. It’s a quick, easy and painless process and there are no fees involved. Best of all, a more favorable loan will allow you to pay less interest due to its lower monthly payments. As a result, you will be able to spend more money on gas or even towards your savings.
If you lease or own a car, you are eligible to lower your monthly payments through auto loan refinancing. If you enjoy your car but not parting with your money each month because of the car payments, then you are an ideal candidate. If the status of your job has changed making it hard to keep up with monthly payments, then you should consider refinancing. Or if you realize your original loan from the auto dealer wasn’t such a great deal, after all, you are perfect to take advantage of an auto refinance. Below is the process and a few of the steps to consider when seeking an auto loan refinance.

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Before applying to refinance your auto loan

Determine your credit history
You should find out your credit score before starting the process of refinancing. Knowing your credit score allows you to negotiate a better deal. Your chances of lowering the monthly interest rate of an existing loan are influenced by whether your credit has improved from the time you started paying off your original loan. Getting your credit report online is easy, and helps you determine your credit score.
When seeking loans, borrowers are grouped into the following five categories based on their FICO scores:
  • Super prime: most qualified (781-850)
  • Prime: qualified (661-780)
  • Nonprime: qualified (600-660)
  • Subprime: less qualified (501-600)
  • Deep subprime: least qualified (below 500)

Decide whether it is worth refinancing your auto loan

Not all auto loans are good candidates for refinancing. You should consider the following before taking any further steps.
If your car is worth less than what you owe on your loan, you are considered to be upside-down.
As an example, if you owe $11,000 on your loan and your car’s value is just $8,000, then you are upside-down on your loan by $3,000. In other words, your car has depreciated faster than you have paid off the loan.
If you are indeed upside-down, you should forgo refinancing and instead pay off the loan as quickly as possible. To determine whether you are upside-down learn the following:
  1. The amount of money that is owed on your loan.
    What you owe is also called the “payoff amount” of your loan. You can contact your auto lender for your remaining amount.
  2. The value of your vehicle.
    This information is readily available at a car research site such as Kelley Blue Book.
You can also figure out how much you will save each month if you refinance your auto loan by using an auto loan calculator. Auto Loan calculators can be found at or at a financial information site such as Bankrate.

Seek out the best auto loan lender

When shopping for the best type of auto refinancing loan, consider your options of a direct or indirect loan. With a direct loan, you set up the refinancing through a bank, credit union or online finance company. Indirect loans are offered through car dealerships. You most likely won’t be offered the best deal, but it is still a good option to consider for those who have good to poor credit.
Comparing terms among auto lenders
You are now ready to compare the various auto lenders. When seeking out an auto lender, you should be familiar with the following terms:
  • Type of loans: Learn about the various types of loans the company provides.
  • Interest rates: Seek out the lowest annual percentage rate (APR) possible. The APR affects the amount of money you pay each month and your total loan cost.
  • Loan amount: Determine the minimum and maximum amount the lender will loan.
  • Loan length: Check for the terms and what options offered for loans. The term of auto loans usually range from two to five years but it can be as long as seven years. Just remember the longer the length of your loan, the more money you end up paying because of accrued interest.
  • Application process: Applications are offered online by most auto lenders, as well as in-person. by phone or mail. Be prepared to provide information about you and your vehicle. Personal information that will be requested on applications includes your Social Security number and work history, including W2’s or paystubs to verify income. Information about your vehicle includes its model, make and year, its Vehicle Identification Number (VIN), the name of your auto lender, the amount of time left on your loan and the amount of money owed.
  • Restrictions: Restrictions may exist based on the type, age, and mileage of the automobile.
  • Fees: Ideally, a loan won’t have any prepayment, origination or hidden fees attached to obtaining the loan, but check to make sure you are aware of any such fees.

Find an auto loan company with the best deal

Now that you are familiar with what is important to look for when comparing auto lenders, here are a few auto loan companies and their terms to consider. Review more in SuperMoney’s Directory of Auto Loan Reviews, which compares auto loan companies and provides real user reviews and ratings.

SuperMoney may receive compensation from some or all of the companies featured, and the order of results are influenced by advertising bids, with exception for mortgage and home lending related products. Learn more

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Julie Pimentel

Based in San Francisco, Julie Pimentel has served in various capacities at startups including CitySearch, GeoCities, Photobucket and JamBase where she learned to wear multiple hats from sales, marketing to business development. When she's not writing online, she's working with clients from her digital marketing agency to help grow their audiences and improve their online presence and conversions.

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