How to refinance a car loan
Quick insights
- Refinancing replaces existing car financing with a new contract that ideally offers lower interest rates or a more manageable monthly payment.
- The process involves identifying your current account details, checking your credit score and researching various lenders to find a competitive offer.
- Alternative options like renegotiating your debt or selling your vehicle may be necessary if you do not meet the criteria for new financing.
Do you want to save money on your car financing? Refinancing your car could potentially save you money by lowering your monthly car payment or decreasing the amount of interest you pay. You can then put that money toward savings, home improvements or paying off credit card debt. Find out how to refinance a car and when it’s the right time to do so.
Already familiar with auto refinancing? See how refinancing with Chase Auto could help you.
What does it mean to refinance a car?
In a typical auto refinance transaction, a new loan is used to satisfy the outstanding balance of your current auto account, and you then make payments under the new loan's terms. The application process for refinancing doesn't take much time and many lenders may make determinations quickly. Still, there are things to consider before taking the plunge.
How to refinance your car financing in six steps
The process may vary slightly according to the lender, but knowing some basic steps can help prepare you for what comes next.
1. Decide if refinancing makes sense for you
Refinancing your car could lower your monthly car payment, help pay off your car faster if you choose a shorter financing term or lower your interest rate. However, refinancing might not be possible if any of the following factors apply to you:
- You're behind on your payments: Any late payments on your existing contract could eliminate the possibility of qualifying for financing with better terms.
- Your current financing has a prepayment penalty: A prepayment penalty is a fee for paying your loan off early and could cancel out any potential refinancing savings.
- You owe more than your car is worth: Securing favorable terms could prove problematic if the balance on your contract is greater than the value of your vehicle.
- You have an old vehicle: Some lenders won't refinance older or high mileage vehicles, so it could prove more beneficial long term to upgrade your car.
2. Check your credit
Lenders rely heavily on your credit report and credit score when approving financing and determining an interest rate. A higher credit score typically translates into lower interest rates. Keep an eye on your credit score, as it may have changed over time.
3. Gather relevant documents
Organizing your documents ahead of time can help simplify the application process. Most of the time, you'll need the same items used for securing financing, including:
- Your driver's license
- Pay stubs or other proof of income
- Your Social Security number
You may also need to obtain a payoff quote from your current lender once your refinance application is approved. A new lender might request details about your existing financing, such as:
- Your remaining balance
- Your current monthly payment
- Vehicle information, like the vehicle identification number (VIN)
- The amount of time left on your contract
- The interest rate you're paying
4. Ask the right questions
Before signing on the dotted line, cover your bases by asking questions and reading the fine print. Talk to lenders and ask, “how does refinancing a car work?” Also, get answers regarding the expected annual percentage rate (APR), financing duration and if there are any origination fees or early payoff penalties.
5. Compare lenders and rates
Shopping around with multiple financial institutions can help you find a more competitive offer for your unique situation. Choosing to get prequalified with different lenders can help you see specific rates and terms without a significant impact on your credit history.
You may wish to compare which lenders conduct "hard" vs. "soft" credit checks. Hard credit checks could temporarily lower your credit score, while a soft check is unlikely to have an impact.
6. Apply for refinancing
If you've found the right deal and are confident about your ability to qualify, you might be ready to jump right in and start the refinance application process. Just know that it can trigger a hard credit check on your credit report.
When should you consider refinancing your car?
Refinancing a car isn't for everyone and deciding when to refinance can be challenging. The benefits of refinancing might be limited or non-existent in certain instances. For example, if you have a poor payment history on your current contract or are close to paying it off, it may not be to your advantage to refinance.
However, there are times when refinancing your car can benefit you. You may want to consider refinancing your car if any of the following situations apply to you.
Your credit score increased
Your credit score is one of the main factors a lender considers when determining financing approval and credit terms. If you financed your car with a low credit score, refinancing your car could get you a better interest rate or even reduce your monthly payment.
Interest rates have dropped
If you bought your car when interest rates were high, refinancing your vehicle can save you money, possibly more than you realize. An interest rate decrease of only 2% to 3% could save you hundreds if you do not extend the term of your contract. An auto payment calculator can show you how interest rates affect your monthly payment and the total amount you could pay in interest over the life of the contract.
You didn’t shop around for rates initially
If you got your original financing from the car dealer, you might have spent too much. Buyers don't always check their credit score or research interest rates before heading to the dealership, and the terms of their financing may have suffered because of it. If you took the offer from the dealership without knowing what options were available, you might not have received the best deal.
Your monthly payment is too high
If your monthly payment is too high, refinancing your car could help. A lower interest rate can decrease your monthly payment, but it may not be enough to make the difference you need. Extending the length of your contract can have a greater impact on reducing your monthly installment. However, a longer term increases the amount of interest you'll pay over the life of the financing, assuming no change to your interest rate.
What to do if you can’t refinance
If you find that you do not qualify for auto refinancing under your current circumstances, there are other financial paths you can take to manage your debt. Exploring these alternatives can help you avoid damaging your credit score or facing vehicle repossession.
- Sell the car: Selling your vehicle and using the proceeds to pay off your existing balance can eliminate the monthly payment entirely.
- Renegotiate financing terms: Contact your current lender to discuss a contract modification or a different repayment schedule. Some lenders are willing to adjust terms if it means more consistent payments from the borrower.
In summary
Refinancing your car could save you money by lowering your monthly payments or reducing the total interest paid, allowing you to allocate funds to other financial goals. Note, however, that refinancing may result in greater overall costs, a longer repayment term or higher monthly payment depending on circumstances.
