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Can You Refinance An Auto Loan?

Victoria Araj5 minute read
UPDATED: June 02, 2024


When refinancing a loan, you’re replacing it with a new loan that ideally lowers your original interest rate and monthly payment. Borrowers generally refinance when current rates drop or their credit scores improve. You can refinance a personal loan and a mortgage for better rates and terms, but what about an auto loan?

Let’s walk through the process of auto loan refinancing, look at factors that’ll affect your rates, and discover when it’s a good time to refinance.

What It Means To Refinance A Car Loan

An auto or car loan can be refinanced like most other types of loans, and you can come away from it with a lower interest rate or an extended loan term – both of which have the potential to lower your monthly car payment.

There’s risk involved with an auto loan refinance, though. Long-term auto loans can cost you more in the long run since you’ll pay more in interest over time than you would with a shorter loan term. Think about this before opting to extend the life of your loan.

It’s also smart to weigh the potential cost of refinancing. Lenders can charge origination fees to process a new loan. Depending on your loan and lender, refinancing could also incur a prepayment penalty.

In light of these factors, consider whether refinancing your auto loan is the right option for you.

Factors Affecting Auto Loan Refinance Rates

Refinancing could be worth it to secure a lower interest rate. Lenders observe several factors when determining auto loan rates. These include:

  • Credit score: Your credit score will usually play an important role in determining your interest rate. The higher your score, the lower the interest rate may be.
  • Loan term: The length of your repayment period can also affect your annual percentage rate (APR). A longer term may get you lower monthly payments, but it’ll come with higher interest rates.
  • Age and mileage of vehicle: A car that’s several years old, has high mileage, or both, will incur higher interest rates and fees. Some lenders won’t even offer loans for cars older than 7 years or with over 100,000 miles.
  • Loan-to-value (LTV) ratio: Rates can also be influenced by the loan amount you want to borrow versus the vehicle’s appraised value. A higher LTV ratio could result in a higher interest rate.

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How To Refinance A Car Loan

The application process for refinancing an auto loan can be similar to when you took out the original loan. If you’ve decided refinancing is right for you, follow these steps to get your new loan:

1. Review Your Current Loan And Credit Report

To save time when speaking with auto loan refinance lenders, gather all the information you can about your current loan. This includes:

  • Your lender’s name
  • Your loan term
  • Your loan’s APR
  • Your monthly payment
  • Your payoff amount or how much you’ve repaid on the loan

You should also review your financial situation and factors potentially affecting your interest rate. Determine your vehicle’s value, age and mileage, and check your credit score to see if you could qualify for a better interest rate with an auto loan refinance.

2. Gather The Proper Documents

You should gather and prepare the same documents from when you applied for your initial loan, plus documents required for refinancing. These documents include:

  • A photo ID, such as a driver’s license
  • Your vehicle’s registration
  • Proof of car insurance
  • Proof of income
  • Proof of address
  • Your vehicle identification number (VIN)
  • A 10-day payoff statement from your current lender

Having these documents handy can help the refinancing process run smoothly.

3. Compare Loan Offers

Shop around with traditional banks, credit unions and online lenders to see who can offer you the best refinancing deal. With some lenders, you can get prequalified and see the rates and terms you’re eligible for based on a soft credit check. This type of credit check won’t affect your credit score, so you can get prequalified multiple times if you wish.

When deciding on a lender, pay special attention to these loan aspects:

  • Loan conditions: Read a loan’s disclosures carefully to know if it comes with additional costs or prepayment penalties.
  • Loan term: The length of your loan will affect your interest rate and monthly payment amount.
  • Interest rate and type: Make sure you’re getting a lower interest rate than you have now, and know what type of interest it is. It’s usually best to agree to a simple-interest
  • Additional fees: Origination fees and other upfront costs all factor into the total cost of your loan.

Refinancing should improve your financial situation, so make sure you understand everything about a loan before taking it on.

4. Apply For Your New Loan

Once you’ve chosen a lender, you can submit a full application. Whether you’re applying for a personal loan or auto loan – the application processes should be similar – you’ll likely undergo a hard inquiry to determine your rates. You’ll also need to provide the payoff amount and statement from your current lender.

5. Start Your New Payments

Approval for a new auto loan can take 2 – 4 weeks (this varies among lenders), as opposed to 1 – 7 business days for a personal loan. Confirm with your original lender that the loan has been paid off, before you begin making payments toward your new loan.

When To Refinance Your Auto Loan

There are more suitable times to refinance an auto loan than others. Refinancing might work well for you if:

  • You’ve improved your credit score since you first got the loan
  • Auto loan interest rates have trended downward since your initial loan
  • Your car or vehicle meets age and mileage requirements for most lenders
  • Your current interest rate or monthly payment is too much to handle

Conversely, you might think twice about refinancing if:

  • Your new loan offers a longer loan term, and more interest payments over time
  • Your current loan has a prepayment penalty you’ll be charged with if you refinance
  • Refinancing would negatively affect your car insurance rate. (Talk with your insurance company first about how refinancing might affect your policy.)

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FAQs About Auto Loan Refinance

How soon can I refinance a car?

The earliest you can refinance a car loan is 60 – 90 days after taking out the original loan. However, financial experts generally recommend waiting at least a year – or until your credit score has gone up.

Does refinancing a car hurt my credit?

Refinancing a car loan typically requires a hard credit inquiry, which can ding your credit score about five points. This is temporary and should only affect your credit for about a year.

Can I refinance an auto loan with bad credit?

Unless your credit score can qualify you for a better interest rate than you started with, refinancing your auto loan doesn’t have much benefit. Take steps to improve or build up your credit before looking at refinancing options.

Can I refinance my car with the same lender?

You can go through your same lender if that lender offers auto refinance loans, and if your vehicle meets age and mileage requirements. You should still shop around to see if better deals are available elsewhere, though.

Final Thoughts

Refinancing can get you better rates, terms and monthly payments if you want a change in your financial situation. There’s a lot to consider before refinancing your auto loan, though. It’s best to review your current loan, vehicle information and credit score, and compare offers from lenders, before coming to a final decision.

See what personal loan rates you qualify for if you’re thinking of refinancing your auto loan.

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.