Auto Loan Refinancing

How to Refinance a Car Loan

You may love the fact that your vehicle gets you where you want to go, but hate the car loan you pay every month. If you decide to refinance your car loan, it can save you money and possibly reduce the length of the loan. Read on for a complete guide to auto loan refinancing.

When should you refinance your auto loan?

Whether you should refinance your auto loan depends on several factors. It may make sense to refinance a car loan, if one of the following applies to your situation.

  • Your credit has improved.
    If you have a higher credit score since you bought the car, you may be able to qualify for a lower interest rate. This can mean you pay less each month and less interest over the life of the loan.
  • Interest rates have dropped.
    If interest rates have dropped 2% or more, you may save money by refinancing your car loan. Even if interest rates haven’t dropped, you may not have the best rate possible. This is your chance to get a better interest rate.
  • You’re having trouble making your payments.
    If your financial situation is currently strained, you might be able to refinance to a longer term loan. This will stretch out the payment schedule, making payments smaller and more manageable every month.

Understand your auto refinancing savings

Before you jump into an auto loan refinance, calculate your potential savings. Knowing how much you could save each month and over the life of the loan will help you determine if refinancing makes financial sense.

Online loan refinance calculators (like this) help you make comparisons. You enter required information, including the total amount left owed on the loan and the current monthly payment amount and interest rate. The calculator provides you with alternate payoff scenarios.

If you currently owe $20,000 on your auto loan at 7% interest, and you’re paying $300 per month for the next 85 months, you’ll pay $5,401 of interest over the life of the loan. Here are interest reduction scenarios for comparison. (Keep in mind–these loan refinancing scenarios are examples and don’t include any taxes or extra fees.)

  • A reduction to 5% interest will lower the monthly payment to $280, saving you a total of  $1,702.
  • A reduction to 4% interest will lower the monthly payment to $271, saving you a total of $2,490.
  • A reduction to 3% interest will lower the monthly payment to $261, saving you a total of $3,262.

Questions to ask when refinancing an auto loan

Before you refinance your auto loan, ask the lender(s) the following questions:

  • Are there prepayment penalties?
    According to the Federal Deposit Insurance Corporation (FDIC), some companies charge a prepayment penalty when you refinance an auto loan before it matures. If you’ll need to pay prepayment penalties to your existing auto loan lender, you may not want to refinance. Determine how much the penalty will be. If it’s more than you’ll save refinancing, it’s not worth the trouble.
  • Does your car qualify for refinancing?
    Generally, if your car has fewer than 100,000 miles and is younger than seven or eight years old, it will qualify for refinancing. The vehicle must also be worth more than the loan balance. (Determine the current value of your auto by consulting
  • Do you qualify?
    Is your credit good (+670), which will enable you to qualify for a competitive refinancing loan? (If you’ve been paying your auto loan on time, you should qualify). If you have a low credit score, consider an auto loan lender that caters to borrowers with bad credit.
  • Does your existing loan qualify for refinancing?
    Usually, the outstanding balance on your auto loan must be at least $10,000 to refinance.
  • What are your new loan details?
    What will your monthly payment, interest rate and length of the loan be? And are there any extra fees? These specifics will help you determine if refinancing is the right option for you.

Negotiate a better auto refinance interest rate

Don’t assume the lender has your best interest at heart when it comes to refinancing your auto loan.

You are your own best advocate.

Keep the following in mind during negotiations to ensure that you get the best auto refinance loan possible.

  • Know your credit score.
    Being aware of your credit score before seeking a new loan for your car can help during negotiations.
  • Do your homework.
    Go online and research the various interest rates, terms and payment amounts, so you’ll know what is fair when you receive a refinance offer.
  • Have all paperwork on hand.
    Information needed to refinance a car loan can include proof of income, proof of insurance and proof of identity. You will also need the car’s make and model and vehicle identification number (VIN), as well as the auto’s current mileage.

FAQ on Refinance Car Loan

Why should you refinance your car?

When you can replace your existing loan at a lower rate, it’s best to refinance as early as possible. Refinancing your auto loan could help lower your monthly payments by lengthening the term of your repayment. Or it could help you save money through a lower interest rate.

How long should I wait to refinance my car?

Wait at least 60-90 days from getting your original loan to refinance. It typically takes this long for the title on your vehicle to transfer properly, a process that will need to be completed before any lender will consider your application. Refinancing this early typically only works out for those with great credit.

Do I have to put money down to refinance a car?

Most lenders only consider refinancing if you owe from $7,500 to $30,000, provided your car is less than 5 years old and worth at least what you owe. If you owe more than the car is worth, you may need to pay the difference in order to refinance.

Does refinancing hurt your credit?

When you refinance a loan, you are closing out an old loan account and replacing it with a new one. This can affect your credit scores because most scoring models take into account the age of the credit accounts on your credit reports. The longer your credit history, the better.

Can you negotiate refinance rates?

Refinancing often makes sense if you can redo the loan at a lower interest rate, but it costs money to refinance. Depending on how sharp your negotiating skills are, cutting loan processing fees and closing costs is where you can save money.

Find the best car loan refinancing companies

If you decide to refinance your auto loan, opt for a company that offers a desirable interest rate and length of loan. Consider the following car loan refinancing companies, which feature competitive interest rates and cater to borrowers with a wide variety of credit types.

Alternative loans

There are other options to consider when it comes to paying for your car, such as paying off your car with savings or a personal loan.

If you have enough savings, it may make sense to use the money to pay off your car loan now. You may save thousands of dollars in interest over the life of the loan. Paying off the car loan also gives you the added security of knowing that the car is yours should you experience financial trouble.

You may also find it advantageous to use a credit card to pay off your car. Pay the auto loan balance with a credit card, then do a balance transfer to a 0% interest credit card. As long as you pay off the credit card within the promotional period, you won’t owe any interest.

To help you choose the best auto loan refinance lender for your situation, check out SuperMoney’s auto loan reviews page.