How to refinance a car loan

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

You might have heard people talk about refinancing their home to get a better interest rate. But did you know you might be able to do that with your vehicle loan too? There are many reasons to refinance a vehicle loan, including potential interest savings if your credit has improved since you bought the car. Learn how to refinance a car loan below.

What Does It Mean to Refinance a Loan?

Refinancing a loan means taking out a new loan to cover the old debt. For example, imagine you bought a car for $20,000 and financed the entire purchase price. You’ve been paying on it for a while, and you now owe $15,000.

If you decide to refinance the loan, you get a new loan (with new terms) for $15,000. The funds from that new loan pay off the old loan, and you begin making monthly auto payments on the new loan.

Reasons to Consider Refinancing

Refinancing might sound like shuffling money around, but it can serve a purpose. Some reasons to consider refinancing a car loan can include:

  • You have better credit than you did when you first got the loan. You may be able to get a better interest rate on a refinance and save yourself a lot of money over the rest of the life of the loan. For example, the difference between three percent and six percent on a $25,000 car loan over 60 months is close to $2,000.
  • You want a lower monthly payment. You may be able to refinance with better terms or extend your loan longer, which can reduce your payment. For example, if you originally financed for 60 months, you could refinance for 72 months and reduce your payments.
  • You aren’t satisfied with your lender. If you don’t like the service at a specific restaurant, you dine somewhere else. If you don’t care for the quality of the goods at a certain store—or the cashiers there are always ringing you up incorrectly—you can start shopping somewhere else. And if you don’t like the quality of service you get from your current vehicle loan lender, you can refinance your loan and work with a different bank.

5 Steps for Refinancing Your Car Loan

While the details vary from situation to situation, the process for refinancing a car loan does not. If you want to know how to refinance a car loan, you can follow the steps below in most cases.

1. Decide If Refinancing Is Right for You

First, decide if refinancing a car loan is right for you. This is a financial process that might have an impact on your credit, so you do want to ensure you have a good reason for going through it. Weigh the benefits with any potential consequences.

For example, if you want to refinance to lower your car payment, you may refinance with a six-year loan. That could add several more years of payments—including interest—which could mean you pay more out over the life of the loan than you intended.

If you need the wiggle room in your budget right now but believe your income will increase in the near future, this might still be okay, because you could benefit from the lower payment now and then pay more on the car per month in the future to pay it off faster.

Obviously, your situation is unique, but applying this type of forward-thinking consideration helps you make the decision that’s right for you.

2. Gather Information and Check Your Credit

Once you have decided you want to refinance a car loan, start with a bit of research. Here is some of the information you may want to gather:

  • Information about your existing loan, including the interest rate, the monthly payment and your payoff amount. The payoff amount is around what you’ll need to borrow to refinance. It’s a good idea to know your interest rate and terms so you can tell if you’re getting a better deal with your refinance.
  • Your current income and personal details. You will likely need to enter this on any loan application.
  • Your credit score and an understanding of your credit history. Whether or not you can get better terms with your refinance may depend on whether or not your credit has improved or at least stayed the same, so it’s important to know where you stand before you start applying for loans.

3. Shop Around for the Best Terms

Research auto loan refinance options to find the best terms you may be able to apply for. In some cases, you might be able to get preapproved for loans based on information you enter and a pull on your credit report.

If you go through preapprovals or approvals for several loan options, make sure to keep your applications all within around a 14-day period. This helps ensure the credit bureaus treat it like one inquiry and not a bunch of hard inquiries for credit. Hard inquiries lower your credit score slightly, so when you can limit them to one, it’s better for you.

4. Prepare and Submit Your Loan Application

Once you choose a lender, prepare and submit your loan application. Take your time entering all information. A loan application could be denied simply because a typo made it impossible to pull your credit or made it look like you didn’t make enough money to afford the monthly payment.

If you apply for an auto refinance online, you may hear back within seconds. But in some cases, lenders might take one or two days to respond. They might also reach out to ask you for more information as they consider your loan. If you apply, keep an eye on your contact methods, such as emails or texts, and respond in a timely manner to any requests for documentation or clarification.

If you don’t respond, your loan application could be denied simply because the lender didn’t have all the information they needed to make a decision.

5. Begin Making Payments on Your New Loan

When the loan is approved, the new lender will make a direct payment to the old lender. Your old loan is paid off and closed, and you begin managing your new loan. Make sure you start making payments on time to the new loan to avoid fees and negative reports to the credit bureaus. You might think that you have improved your financial situation and credit history over time and are in a great place to refinance a car loan.

But when you check your credit, you might find some surprise negative items bringing down your score and affecting your opportunity at refinancing to save money. If you discover inaccurate or fraudulent negative items on your credit report, Lexington Law’s credit repair services can help you challenge them and set the record straight for the benefit of your credit score.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Reviewed By

John Heath

Directing Attorney

Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.