An auto loan refinance is when you replace your current car loan with a new loan that has a lower interest rate and/or a different loan term. Refinancing is one of the best ways to lower your monthly payments or save a significant sum on interest over the life of your loan1.
If you’re struggling with your monthly payments, hoping to save money in interest, or even just interested in switching loan servicers, refinancing could be right for you. Here’s everything you need to know about how to refinance a car loan.
Determine if a car loan refinance is right for you
Refinancing is ideal for two types of people: those whose financial situation has improved in recent years, and those whose personal finances leave them unable to afford loan payments.
If your financial situation has improved
If your income or credit score is higher now than it was when you first took out your car loan, refinancing could help you unlock lower rates. Since loan offers are made based on a client’s credit history, your improved financial situation might make you eligible for lower interest rates than you were approved for originally.
You can also use refinancing to shorten your loan term. This can help you to pay off your debt sooner. Shortening your loan term is one of the best ways to reduce the total amount of interest you pay — which could save you thousands of dollars over the life of the loan.
If you can’t afford current loan payments
If you’re struggling financially, refinancing can help you lower your monthly payments to an affordable level. If you refinance your car loan for a longer term, that will spread out your repayments across a longer period of time. As a result, each monthly payment will be lower.
Lower monthly payments can reduce your financial stress and make it less likely that you’ll miss a payment, which can damage your credit score. It can also free up some breathing room in your budget so you can cover other monthly expenses more easily.
One disclaimer: when you refinance for a longer term, you will pay more in interest over the life of the loan. For example, if you take out a $20,000 loan with a 6% APR and a term of 10 years, you’ll end up paying about $222 per month. Over the span of 10 years, you would pay about $6,600 in interest.
But if you extend that loan term from 10 to 20 years at the same APR, you would pay only $143 per month. That may sound appealing at first. However, over the life of the loan, you would pay about $14,400 in interest.
You can see how these numbers check out for your personal financial situation by using an auto loan refinance calculator. If you’ve decided to move forward with an auto loan refinance, here are the basic steps to follow.
1. Review your current auto loan
Your first step is to look at your current loan. How much do you have left to repay? What are the repayment terms? Most banks and credit unions require you to have a minimum loan amount before they’ll issue a new auto loan refinance. So, if your current loan balance doesn’t reach that minimum threshold, you may not be eligible for a refinance at this time. If you don’t meet one lender’s requirements, keep shopping around. There may be another lender out there who will cater to your specific situation.
Before you move forward with your refinance, you’ll also want to check whether or not your current lender charges prepayment penalties for paying off your loan early. Though they’re not common, these fees can be a nasty surprise if you refinance and find yourself with an additional bill.
2. Review your vehicle details
Your eligibility for a refinance will depend in part on the type of car you have. Many lenders place restrictions on the mileage, age, and type of vehicles they’ll complete a refinance for. If your car is more than 10 years old or has more than 125,000 miles on it, you may have a hard time getting approved for a new loan.
The condition and value of your car matter, too. If your vehicle has sustained damage and has been written off by your insurance company as a complete loss — but it’s still driving — it may be ineligible for a refinance. Additionally, some lenders won’t refinance commercial vehicles or large-engine trucks.
3. Check your credit score
Next, check your credit score against the lender's list of requirements. This will save you time and give you a better sense of what lenders are looking for in terms of creditworthiness. You’re entitled to a free annual credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can go to AnnualCreditReport.com to redeem your free reports.
Keep in mind that the credit scores you see on these reports may be slightly different from the scores your new lender might be looking at. TransUnion credit scoring is based on the VantageScore ® 3.0 model, while Equifax and Experian use their own models.
Here are some of the popular scoring models among refinancing lenders:
FICO® Score☉ 8 and 9: Auto lenders use these scores as a baseline, though they aren’t exclusive to this industry.
FICO® Auto Scores: These are industry-specific scores and are based on several criteria, including your prior history of taking out and paying off auto loans.
VantageScore® 3.0 and 4.0: These credit scoring models are popular among auto lenders and are becoming more common in the overall lending market, as well.
4. Get prequalified
When you’re ready to refinance your car loan, consider getting prequalified online instead of filling out a full application immediately. Prequalification is a process during which a lender takes a cursory look at your credit. The lender then grants you a kind of tentative approval for a new loan that’s contingent upon the deeper credit check they’ll conduct during your final application. Getting prequalified by multiple lenders is a good way to get a sense of your available options.
When you prequalify for a loan, the lender conducts a “soft credit inquiry.” Soft inquiries will only show up on your credit report in certain cases and never affect your credit score.
Once you actually apply for a loan, however, the lender will conduct a hard inquiry. This kind of credit check signals the credit bureau that you’re seriously looking into opening or extending a line of credit. Hard inquiries can negatively impact your credit score.
The exception to this rule is rate shopping. When borrowers research many lenders within a short window of time, credit bureaus consider this financially responsible behavior, and they won’t penalize you. Here’s how different credit scoring models incentivize rate shopping:
FICO: Most modern FICO scoring models allow a 45-day safe harbor period. During this time, FICO counts all new credit checks as one single hard inquiry. As long as you do all your rate shopping within this period, you will only see one hit to your credit report rather than several.
VantageScore: VantageScore treats all inquiries within the safe harbor period as one hard inquiry, the only difference being that the limit here is 14 days instead of 45.
In sum: If you want to prevent undue damage to your credit while you’re checking out your refinance options, do all your research within a two-week period, just to be safe.
5. Apply for the refinance loan
Once you’ve picked a lender, you’ll need to submit a loan application in person or online. Usually that requires you to show the following:
Some form of ID like a driver’s license or social security number
Proof of income, like W-2s or pay stubs
Proof of insurance, like a recent monthly statement
Proof of your residence, like a lease agreement, mortgage statement, or utility bill
Vehicle registration and vehicle identification number
Copy of your driver’s license
Your 10-day payoff statement and payoff amount
Gather these documents before you apply to make the process go even more smoothly. If you’re approved for an auto refinance loan, you’ll get a legal document explaining your new car loan terms. This document will contain all the important details of your loan, including your minimum monthly payment, when your car payments are due, and how you can make those payments.
6. Keep making payments until your loan is paid off
What happens next depends on your financial institution. Usually, your refinance lender will pay off your original loan for you with the details you provided in your 10-day payoff statement –– but, it’s important to confirm. Ask your lender how the process will work: who the loan is disbursed to, who is paying the current car loan off, and what your responsibilities are now that you’ve been approved.
At the very least, you’ll need to continue making payments on your existing loan until it’s paid off by your lender. If you don’t, you could be left with a residual balance on your old loan even after the new lender pays it off. Depending on the annual percentage rate, that residual loan balance could grow into a significant sum as you miss payments, and your credit score will suffer in the process.
Is a car loan refinance right for me?
There are many factors you’ll need to consider before deciding whether or not to refinance your car loan.
Auto loan refinancing may be ideal for you if:
Your financial standing has improved and you can leverage your new, higher credit score to get a better interest rate.
Average auto loan rates have gone down and you think refinancing could help you secure one of these lower rates.
You have positive equity in your car (i.e., your car’s value is worth more than the total amount remaining on your loan balance.)
Auto loan refinancing may not be ideal for you if:
Your income is unpredictable.
Average auto loan rates have gone up in recent years, in which case you could end up saddled with a higher interest rate.
Your car is more than 10 years old and/or has more than 125,000 miles on it.
There’s little time remaining on your loan, in which case refinancing fees may eat up the amount you save on interest.
Compare auto loans with Navient Marketplace
Whether you’re looking for lower interest rates or longer terms, Navient Marketplace can help you find an auto loan refinance provider that’s right for you. In less than a minute, you can fill in a few details about your car and your financial goals, and we’ll automatically match you with refinance lenders who fit your needs. Then, you can use our platform to browse the available options, compare offers, and choose the perfect provider for you.