Woman on laptop in car refinancing auto loan.

How to Refinance a Car Loan

Hanna Kielar5-minute read
December 30, 2021

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If you took out a car loan and then improved your credit score, you may be paying more for your vehicle than you need.

This guide reviews how to refinance a car loan and what you should do before considering taking out a new loan. Refinancing could save thousands of dollars in interest, lower your monthly payment and improve your credit score in the long term. 

When You Should Refinance A Car Loan

Your financial situation may have changed since you took out your original loan, but when is the right time to refinance your car?

You may be making more money, meaning you’re able to pay off a loan quicker. Or, your money could be tight and you’re now needing to reduce your monthly payments. When you decide to take this route, make sure you’re addressing your current needs so that you find the right loan.

The following scenarios may make refinancing a good option for you.

  • Your credit score has improved. Auto lenders use credit ratings to calculate how much risk is involved in a loan. If you have proven that you pay your bills consistently, you may be able to secure better loan rates and save money.
  • Interest rates are better. Because lenders can offer different rates depending on what the Federal Reserve does and other economic factors, you could get a better interest rate by waiting for the right time. A lower interest rate can save you thousands of dollars over the life of the loan.
  • Your financial situation has changed. You may have changed jobs, gotten married or had children since you took on the original debt. Life changes have an impact on what you can afford each month and refinancing allows you to seek loan terms that are more aligned with your financial goals.
  • You have no prepayment penalties on your original loan. It’s important to check the terms of your original loan to see if you’re going to be penalized for paying the loan off early. This could mean refinancing isn’t worth it. When you’re calculating the cost of your new loan to see how much you’d save, don’t forget to include any prepayment penalties when factoring the difference.
  • Your car meets refinancing requirements. Check with lenders to see what their requirements are for refinance loans. Most lenders have mileage and age requirements and typically won’t refinance your loan if you have over 100,000 miles on the vehicle, have a salvage title, or the vehicle is too old. Your specific lender may have additional requirements.

How To Refinance An Auto Loan

The best way to refinance a car is to do your homework and plan ahead. Following these steps can also improve your chance of being approved for the right loan.

1. Check Your Credit Report

You’re able to request a credit report from all three credit reporting bureaus once a year for free. You should do this every single year to see if there’s information on your report that doesn’t belong there. When you find negative marks on your credit report that are suspicious, you can often get those marks removed to improve your score.

You can enroll in a credit monitoring service to receive regular updates or visit the Federal Trade Commission’s website to request a free credit report. To see how your credit score affects your refinance rates, consider the average rates in 2021 based on credit score:

Credit Score

Average Auto Refinance APR

781 – 850

3.4%

661 – 780

4.17 – 6.87%

601 – 660

6.87%

501 – 600

9.58%

Source: U.S. News and World Report

(Your APR may vary depending on other factors.)

2. Get Prequalified For An Auto Refinance

Some auto lenders will allow you to submit limited information to see if their loan terms are right for you before you file a formal loan application. Prequalification still requires checking your credit, however, and you’ll receive a soft inquiry on your credit report for each lender you prequalify with.

According to Equifax™, auto loan inquiries are treated differently than other types of credit inquiries on your credit report and auto loan inquiries made during a 14-45 day period are counted as one inquiry.

Keep in mind that lenders may use the terms prequalified and preapproved interchangeably so be sure to clarify when shopping around for rates.

3. Compare Your Loan Offers

When deciding which loan is right for you, consider the following.

  • Terms and conditions: Does the new loan have any additional costs or penalties such as a prepayment penalty?
  • Length of the loan: You can save money over the duration of the loan if you choose a shorter term, but if you’re looking to reduce your monthly payment, you can accomplish this with a longer term.
  • Interest: What is the interest rate and type of interest? Simple interest is calculated on the original amount of money you borrowed while compound interest is calculated on what you still owe on the loan each month. It’s generally a better idea to agree to a simple interest loan.
  • Origination fees: These are upfront charges you need to pay when you take out the loan. Factor these fees into your loan when calculating the total cost.

Find a loan that helps you accomplish your specific refinancing goals, whether you’re looking to save money on interest, reduce your monthly payment or improve your credit score.

4. Apply With The Lender Of Your Choice

While most soft inquiries don’t impact your credit score, you’ll receive a hard inquiry when you apply formally for a loan. This normally lowers your score by about 5 points and affects your credit for one year. To limit the impact on your credit, you should apply for the loan within two weeks of being prequalified.

To complete the application, you’ll typically need to provide the pay-off amount from your current lender, your driver’s license, proof of insurance, vehicle registration information and proof of residence. You might also need to provide proof of income. 

5. Start Making New Monthly Payments

Make sure that you check with your old lender to confirm that the loan has been paid off so that you don’t incur penalties for not making your payments. Consider setting up automatic payments with your new loans. Many lenders offer discounts when you make automatic payments, and it could help boost your credit rating.

When you take on a new loan, your credit score may drop for the first year, but making your monthly payments on time can help it recover. After the second year, your credit should be better off than it was before you refinanced your loan.

Car Loan Refinance FAQs

How long should you wait to refinance a car?

You can refinance as soon as 90 days after you took out the original loan, but it’s best to wait at least 12 months. It may be most beneficial to wait until your credit score has improved significantly. 

What do I need to refinance my car?

You need to submit a 10-day payoff statement from your current lender, driver’s license, proof of residence, vehicle registration, proof of income and proof of insurance. Your new lender may require additional documentation.

How long does it take to refinance a car?

This varies, but some lenders are able to complete a loan application with you in two to four weeks. 

Will my auto insurance be affected by refinancing?

It’s important to check with your insurance company to see if your new loan will change your rates. In some instances, your rate may actually go down.

The Bottom Line

Refinancing your auto loan is a great way to reduce your interest rate, monthly payments and the total cost of your loan. Once you’ve made at least 12 monthly payments, consider whether refinancing is right for you. Before you begin searching for a loan, check the value of your car to see what lenders might offer.

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    Hanna Kielar

    Hanna Kielar is an Associate Section Editor for Rocket Mortgage focused on personal finance, recruiting and personal loans. She has a B.A. in Professional Writing from Michigan State University.