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Shopping for a better auto loan — and refinancing your current car loan — will probably save you money and can be relatively painless. Applying to refinance often takes less than an hour, and many lenders promise to make a loan decision in minutes.
Refinancing your auto loan can make sense under several scenarios. For instance, if your credit has recently improved, there’s a good chance you can lower your interest rate and monthly payment. You might also be able to shave some time off the loan, or go the other way and extend the term — lowering your payment — if you’re having trouble making your monthly payment.
If you're wondering how auto loan refinancing works, here are the steps to successfully refinance your auto loan.
1. Collect documents
Find a recent payment stub from your current auto loan and make sure you know the following:
Your current monthly payment and the remaining balance.
The amount of time left to repay the loan in months, often called the loan term.
The interest rate you're paying.
The customer service number of the lender in case you have questions.
Dig out your original loan contract and verify that there are no prepayment penalties. If you can’t find your contract, don’t worry. The lender’s customer service department can give you the information you need, or even email you a copy of the contract.
You’ll also need the following items to complete loan applications:
Your driver’s license.
The vehicle identification number of your car.
Pay stubs from your current employer or proof of employment.
Your Social Security number.
Compare refinance lenders
2. Evaluate your credit
If you’ve made all your car loan payments on time for a year or more, your credit has probably improved and there’s a good chance you can benefit from a refinance.
Of course, that’s only true if you’ve also kept all your other financial commitments up to date. The proof is in the numbers, so you’ll have to find out where you stand, and you have two options for doing so.
You can pull your own credit report — that’s a history of your credit activity — or check your credit score for free to see if you’ve had any problems, such as late payments. Because you are checking your own credit, this kind of research will not lower your score. However, because each of us has many credit scores, the score you get won’t necessarily tell you exactly what interest rate to expect on your new loan.
If there are no new negative marks on your credit report — no new late payments, delinquencies or collection — you are headed in the right direction. A credit score — whether VantageScore or FICO — that is moving in a positive direction is a good indicator of progress.
Your alternative is to simply apply for a new loan and find out how good your credit is as a result of the application. Which brings us to …
Apply to several car loan refinance companies so you can compare interest rates and find the best offer. Note that some lenders will have requirements for how soon you can refinance your original auto loan. The application process doesn’t cost you anything, and you will quickly learn if you qualify for a lower interest rate.
One word of warning: Make sure you submit all your loan applications within a 14-day period. Similar queries in this time period are typically grouped together and treated as one, which lessens the impact on your credit score — it will trigger only a small drop, about five points.
4. Run the numbers
Using an auto loan refinance calculator, first enter information about your current loan. Input the original loan amount, your interest rate and the length of the loan in months. Then enter the balance that is remaining to be paid and how many months are left until you pay off the loan.
Next, enter the number of months you want for the new loan and the interest rate you anticipate getting. You will then see the new — and hopefully lower — monthly payment, how much you will save each month and your total savings over the life of the loan.
This is also a good time to see how much your car is worth by looking up online guides or, better yet, getting cash offers from your local CarMax or online services such as Vroom and Carvana as a baseline. If the balance of the loan is greater than the value of your car, you are upside-down on your loan. Refinancing may not be possible. Some lenders, however, will lend more than the car's value.
In some cases you may see only a small difference, or none at all. And if you are close to the end of your loan, an auto loan refinance may not be worth the hassle.
6. Evaluate loan terms
If you decide to refinance, you can leave the length of your loan unchanged or consider these options:
Pay off the loan more quickly. If you’re used to making loan payments of a certain amount, you may be able to keep the payment about the same but shorten the length of the loan. This saves you money because you’ll pay less interest over the life of the loan.
Lower payments with a longer loan. If your budget is stretched and you want a little financial breathing room, you could extend the loan term by a few months or even a year to lower your payments. This isn’t ideal because you’ll pay more interest in the long run. However, it’s better than missing payments and damaging your credit history.
7. Complete the process
If you decide to refinance, complete the application with the lender you choose. You’ll be sent the loan paperwork, and you simply respond to the lender’s requests.
Here’s a quick overview of what you can expect: Refinancing starts your auto loan over, so you’ll sign new loan documents and a new loan will be created for you, at a new interest rate, with the term length you choose. Your new lender, the refinance company, will pay off your old loan, and you’ll begin making payments to your new lender at the lower rate.
While there are many details to take care of, the entire auto loan refinancing process can be completed in a few hours.