Can you refinance a car loan?

Key takeaways

• Refinancing a car loan can lower your interest rate or monthly payment, but it’s important to weigh origination fees, loan terms, and prepayment penalties before deciding.
• Your credit score, vehicle value, and loan-to-value ratio, along with current interest rates, all affect whether refinancing saves you money.
• The refinancing process involves reviewing your credit and loan terms, estimating your car’s value, and comparing multiple lenders and offers.

If your monthly car payments have become a burden, you’re not alone. Many people are feeling the same financial pinch. Perhaps you bought your car when interest rates were higher, or your credit was lower. You may be wondering if you can refinance your car loan.

The answer is yes. You can refinance a personal loan, mortgage loan, or car loan. It may give you the flexibility to get a lower rate, better terms, or a lower monthly payment.

But refinancing your car loan is not always a smart financial move. Let’s explore when it makes sense, when it doesn’t, and how to make the best decision for your situation.

What it means to refinance a car loan

When you refinance a car loan, you are applying for a new auto loan to pay off your existing one. People refinance car loans for many reasons. They might want to lower their monthly payments, lower their interest rate, or shorten or extend the term of their loan.

Here’s a quick reference of some of the different types of lending options available:

• Shorter loan term: If you refinance to a shorter term (say from 72 months to 48 months), it may increase your monthly payment, but it usually reduces the amount of total interest you pay when other things such as the interest rate are equal. This saves you money and gets you debt-free sooner.
• Longer loan term: Some people may prefer to refinance to a 72-month car loan if they want to reduce their monthly payments. This helps if you’re struggling to make your payments. However, it usually comes with a higher interest rate. You’ll also pay interest for longer, meaning a higher lifetime cost to your loan.
• Lower interest rate: If your credit score has improved, or the market has changed, you could qualify for a lower interest rate. This could save you money and lower your monthly payments.

One thing to keep in mind is that refinancing isn’t free. Lenders often charge origination fees, title transfer fees, or application fees. You’ll also want to check your current car loan to make sure it doesn’t include a prepayment penalty. This is a fee for paying off your loan early.

Factors affecting auto loan refinance rates

Refinancing your car loan doesn’t automatically result in a better deal. There are many factors that influence whether a lender is willing to give you a lower rate or better terms.

Your credit score: This plays an outsized role in the interest rate you’ll qualify for. Generally, a higher credit score means a lower interest rate. This is because lenders see a high credit score as an indication that you are a low risk.

Market conditions: Just like mortgage and personal loan rates, auto loan interest rates move with the market. Decisions by the Federal Reserve to raise or lower the federal funds rate ripple through the markets and affect the APR lenders charge.

Age and condition of your vehicle. Older cars are riskier for lenders because if you default and they repossess it, it will be more difficult to sell. Cars also lose value fast, so depending on the term of your loan, your car could depreciate faster than you pay off your loan. This is what’s called an upside down car loan. Websites specializing in estimating a car’s value may have strategies for beating car depreciation.  

Some lenders may impose limits on the age and mileage of a car, such as 10 years and 125,000 miles.

Loan term. If your goal is a lower monthly payment, extending the term of your loan could get you there. But remember, this might mean a higher interest rate and more interest paid over the life of the loan.

Loan-to-value (LTV) ratio. The LTV is a comparison of your vehicle’s loan balance compared to the car’s resale value. But because cars depreciate quickly, if you didn’t put at least 20% down when you bought the car, it could be worth less than the loan balance. In this case, lenders might refuse to refinance your vehicle.

How to refinance your car loan

If you feel refinancing your car is a good idea, here are steps to follow.

1. Review your current loan and credit report

Start by gathering details about your current auto loan, like the payoff amount, current interest rate, and monthly payment. Review your policy or call your lender to see if there is a prepayment penalty. If it’s high, refinancing might not be worth it.

Next, get copies of your credit report and credit score. By law, you are entitled to a free credit report from the three credit bureaus once a year through AnnualCreditReport.com. Look for any mistakes or issues and work to correct them. This is vital since lenders use this report to determine your creditworthiness and, by extension, your interest rate. If you are working on improving your credit score, you may want to check your credit score more often.

Refinancing can also affect your car insurance. For instance, if your new loan eliminates the need for GAP coverage, your insurance bill could go down. GAP insurance is needed when your vehicle’s value is less than your loan amount, or your loan term is very long, resulting in a very slow repayment of principal.

2. Estimate the value of your vehicle

You’ll want an accurate estimate of what your vehicle is worth since the lender will appraise your car to qualify you for a loan. You may want to use one of the many car value websites to research your car’s value. To get the most accurate estimate, you’ll need the car’s make, model, year, mileage, and condition.

Generally, these websites will ask a series of questions about trim and options, so have as much information as possible ready. And be sure to be as objective as possible since an inflated valuation may distort your decision-making. Once you have your car’s estimate and the loan amount you need, you’ll have your LTV estimate and a better idea of whether you will qualify.

3. Gather the proper documents

Just like any other type of loan, refinancing your car loan will require paperwork and documentation. To save time and headaches, gather as much of this as possible in advance. Here are common documents you’ll need:

• A photo ID (driver’s license, ID, or passport)
• Vehicle registration
• Proof of car insurance
• Proof of income
• Proof of address
• Vehicle identification number (VIN)
• A 10-day payoff statement from the current lender

4. Compare loan offers

Once you know your car’s value and have your documents in order, it’s time to shop lenders. Different lenders have different rates and terms, so don’t automatically go with the first offer you see. Even a small difference in interest rate can save a significant amount of money over the life of a loan.

Some lenders offer prequalification. This includes a “soft credit pull.” But don’t let that scare you. This soft credit check doesn’t negatively affect your credit score. Plus, prequalification is a great way to get a feel for what rates you might qualify for without committing to a loan.

When you compare loans, don’t merely concentrate on interest rates. Compare origination fees, prepayment penalties on your existing and the new loan, and other fees. Also consider loan terms. Remember, longer loan terms can make payments smaller, but they typically raise your interest rate and the amount of interest you’ll pay over the life of your loan.

Another consideration is that refinancing can involve title transfer fees. For instance, if a new lender takes over the lien on your car, a new title may need to be issued. You pay for this. It’s a commonly overlooked expense.

The major takeaway here is to be sure to look at the total cost of refinancing your car and make sure it’s a cost-saving move, or at least one that achieves your goals as inexpensively as possible.

5. Apply for your new loan

After exploring all your lender and loan options thoroughly, it’s time to apply for a new loan. This refinancing step is similar to applying for other loans, like personal loans. You’ll fill out an application and submit your supporting documentation.

You will also authorize your lender to do a hard credit inquiry. Unlike the soft credit check during prequalification, this does impact your credit. A single hard credit inquiry usually only lowers a credit score by a few points, and it’s necessary to refinance your vehicle.

6. Start making payments on the new loan

The refinancing process can take two to four weeks, and sometimes longer. When it’s finalized, it’s time to start making payments on your new loan.

It’s important to review your loan documents carefully to ensure you know what the new payment amount is, and when and how to pay it. It’s also a good idea to investigate things like autopay, which can add convenience and, sometimes, discounts.

When to refinance your auto loan

It’s not always advantageous to refinance your vehicle, especially if saving money is your goal. Here’s a quick guide with general guidelines on when it might make sense to refinance and when it might not. This table is for educational purposes.

If you discover that your credit score is too low to make refinancing possible, there are ways to improve your score.

FAQ

Here are some common questions that come up when refinancing a car.

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 a low credit score?

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. You can take steps to build 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.

Do you need a down payment to refinance a car?

Usually, no. When you refinance, you are replacing your existing car loan with a new one. You normally don’t have to put money down. However, if your car is worth less than what you owe, a lender might require you to pay cash, essentially, a down payment, to balance things out.

The bottom line: You can refinance a car loan, which can lead to better rates and terms

Refinancing your car loan can be a savvy way to reduce your monthly payments, lower your interest rate, and save money. But it’s not always the right move. Your credit rating, the age and condition of your vehicle, and the cost of refinancing should all be considered carefully.

Before making any decision, shop lenders and options, with an eye out for prepayment penalties on your existing loan, as well as any fees associated with refinancing into a new one.

"If you're ready to explore loan options for paying off your car, you can reach out to Rocket Loans℠ to see what you qualify for.