How to Refinance a Car Loan

Posted on March 10, 2022

A young couple takes a drive after learning how to refinance a car loan.

If you took out a loan to buy your car, you’re not stuck with your initial auto loan rate forever. In fact, refinancing your auto loan is a relatively painless process and can trim a decent amount off your monthly payment or give you a little extra wiggle room if you’re struggling to make your payments each month.

If you’re wondering where to start when it comes to refinancing your auto loan, you’ve come to the right place. Read on for a closer look at five steps covering how to refinance a car loan, along with a list of frequently asked questions about the car loan refinancing process.

5 Steps for Refinancing Your Car Loan

While refinancing your car loan may seem like a lot of work, it’s a relatively straightforward and worthwhile process. Follow these steps to get started.

1. Check Your Credit

If you’ve been making your car payments on time and keeping up with your other financial obligations, your credit has probably improved since you took out your car loan. However, you’ll want to check to be sure. There are many resources for checking your credit report and credit score.

Taking this step also allows you to correct any misinformation. While you’re at it, commit to monitoring your credit report moving forward. This way, you can immediately identify and correct any potential issues as they arise.

2. Assemble Your Documentation

You’ll first want to make sure you know the terms of your current auto loan. Look at your recent bill or online account to verify your current monthly payment, remaining balance, the amount of time left to repay (the loan term), the interest rate, and a customer service number in case you have any questions.

You’ll also want to confirm whether there are prepayment penalties. You can find this information on your original loan contract, via your online account, or through your lender’s customer service department.

Finally, you’ll need personal documents, including the following:

  • Your driver’s license
  • Your car’s vehicle identification number (VIN)
  • A current pay stub, tax return, or other proof of income
  • Your social security number

You may also be asked to provide proof of insurance.

3. Comparison Shop With Multiple Lenders

The more quotes you get, the more likely you are to find the best offer. Applying for a loan doesn’t cost anything, and most responses are fast, so you can immediately begin comparison shopping. Some lenders also offer a prequalification option based on certain information; others may require a full credit check before providing a quote.

Just make sure to submit all of your loan applications within two weeks as similar queries within a designated period of time are treated as one on your credit report. (See “Will Refinancing My Auto Loan Affect My Credit Score” below.)

After receiving several quotes, compare offers by evaluating the interest rate, repayment terms, fees, and other factors that matter to you.

4. Choose the Best Offer and Apply

Once you’ve narrowed your offers down to the most favorable one, it’s time to submit your application. In the digital age, it’s often fast and easy to do this online. However, depending on the financial institution, this process can also be done over the phone or in person.

5. Read the Fine Print and Sign

After you apply for your auto refinancing loan, it will go through the underwriting process. This will confirm that you qualify and outline the terms of your loan.

When you receive the final contract, make sure to read the fine print to ensure that you understand all the terms and fees and that you’re amenable to them. Once the papers are finalized, your new lender will handle paying off your old loan. Just make sure to verify that the loan is fully paid and the account is closed.

On that note, the contract will also include the details on when you’ll need to start paying your new auto loan. Managing this transition carefully is essential to avoiding missed payments both to your old lender and your new one.

FAQs about Financing a Car Loan

Even with the steps lined up and a path to an auto loan refinance clear, you may still have questions. The following are some of the most-asked questions about how to refinance a car loan.

When Should I Refinance a Car Loan?

There are several scenarios where refinancing your auto loan may be a smart financial move. These include:

  • If interest rates have dropped since you took out your loan
  • If your credit has improved since you took out your loan
  • If you originally financed through a dealership without negotiating the interest rate
  • If you’re in the earlier stages of repaying your loan
  • If you’re having a hard time covering your monthly payments and want to bring down your monthly costs
  • If your existing loan doesn’t include a prepayment penalty clause
  • If you’re not “underwater” on your existing loan (i.e., if your car is worth more than what you owe)
  • If your car is aging, as you may no longer be able to refinance after it reaches a certain age or mileage

Can I Refinance My Car Loan with the Same Lender?

In most cases, you can refinance your car with the same lender, although some lenders do not offer refinancing. But even if yours does, it may not make sense to stick with your current lender. Different lenders may offer better rates, loan terms, and fees. You won’t know if you’re getting the best rate unless you do some comparison shopping.

The takeaway? Even if it seems easier to stick with your current lender, you should always shop around.

How Much Money Can I Save By Refinancing My Auto Loan?

This depends on many factors, including your balance, interest rates, and payoff times. However, in many cases, you can expect to trim a good bit off your loan.

For example, if you are currently paying an interest rate of 6 percent with a balance of $20,000 and an expected payoff time of 60 months, a reduced interest rate of 3.5 percent will end up cutting your monthly payment by $23—adding up to nearly $1,500 over the life of the loan.

Will Refinancing My Auto Loan Affect My Credit Score?

When lenders pull your credit, it will show up on your credit report as a hard inquiry. This can knock a few points off your score. However, if you do all your shopping around within the two-week period, you’ll only be dinged once for them all. This will have a negligible impact on your credit profile.

Let Partners Financial Help Refinance a Car Loan

Now that you know the basics of how to refinance a car loan, you may be wondering where you’re likely to find the best rates and deals.

At Partners Financial Federal Credit Union, we stand ready to help. Choosing a credit union for your loan will guarantee excellent customer service and personalized attention.

Check out the differences between a loan with a credit union and a traditional bank to see what we are all about!


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