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How to Refinance a Car Loan [Step-by-Step Guide]

Financing a car is a long-term commitment. Economic conditions and your personal financial situation can both change significantly during the time when you are repaying your loan.

Depending on your circumstances, refinancing your vehicle can help you save money, free up cash each month, or even pay off your vehicle sooner.

Below, we discuss what refinancing is, its potential benefits and disadvantages, how to refinance an auto loan, and when refinancing may be a good idea.

Read on to learn more about how refinancing can help better align your auto loan with your changing financial circumstances.

What is Auto Loan Refinancing?

When you refinance your car, you take out a new loan with new terms and conditions. The money you borrow is used to pay off your original loan, and you make payments under the terms of your new loan.

You may want to consider refinancing an auto loan to:

  • Lower your monthly payments
  • Lower your interest payments
  • Pay off your loan sooner
  • Increase the stake you own in a valuable asset — your car

However, depending on your circumstances, refinancing can also see you:

  • Paying more than you can afford in monthly car payments
  • Paying more in total interest over the life of a longer loan
  • Owing more on your vehicle than your vehicle is currently worth
  • Paying excessive prepayment penalties, closing costs, or insurance payments

How To Refinance Your Car Loan

If you’re thinking of refinancing your car, working through the following steps should help you determine if it’s the right move for you.

1. Assess Your Financial Health

First up, check your credit report to see if you're in a good position to refinance. A higher credit score than when you first took out your loan could help you unlock lower interest rates and more favorable terms. A lower score, however, may make it difficult to find a better financing deal.

Even if your score has remained more or less the same, higher interest rates could make it difficult to access better loan terms than those you now enjoy. Conversely, lower interest rates could make it easier to improve your loan terms.

Of course, if you have more income than you did when you took out your existing loan, you’ll be able to manage higher payments and a shorter loan. If you have cash on hand for an additional down payment, you may be able to significantly improve your refinanced loan’s terms.

2. Review Your Current Loan Details

Review your most recent statement and take careful note of:

  • Your outstanding loan balance
  • Your loan’s annual percentage rate (APR)
  • The number of repayments you still need to make

Also check your loan documentation for any prepayment penalties, balloon payments, or other restrictions that might affect your ability to refinance your existing loan.

3. Evaluate Your Car’s Worth vs. Loan Balance

Check the book value of your car’s make, model, and specifications from a reliable source, such as the Kelley Blue Book. Compare this to the amount you still owe on your car.

If you find that you owe more than the car is worth, it may not be a good time to refinance. In this case, it’s probably better to wait until you’ve built up more equity before refinancing.

4. Clarify Your Refinancing Goals

Identify what you aim to achieve by refinancing your car loan. Decide if you’re looking for:

  • Lower monthly payments
  • A shorter loan term
  • A lower interest rate
  • To build positive equity in a valuable asset — your car

If you are struggling to make on-time payments on your current loan, lower monthly payments could be a solution, but keep in mind that you’ll pay more in interest over the extended term of your new loan.

If your primary goal is to shorten your term, you might opt to increase monthly payments on your refinanced loan so you can pay it off faster.

If you are looking to save money over a longer period of time, a lower rate will reduce interest charges on your loan balance as you pay it off.

These strategies can work to better align your car’s value with your outstanding loan value—especially if you’re able to contribute extra cash in a new down payment.

5. Compare Lender Offers

Always shop around to access viable loan offers from several lenders. Compare rates and loan terms, but also be sure to check about any closing costs or refinancing fees you may face in each case.

Be sure to check with your existing lender, even if you are very unhappy with your current loan terms or servicing. In some cases, they will waive or reduce refinancing fees or even offer you a better rate to keep your loan on their books.

6. Crunch The Numbers

Comparing offers can get confusing. Use a good auto loan refinance calculator to compare the monthly payments, APRs, and loan lengths for each refinancing loan you are considering. If you have extra money for a down payment, compare the effect of putting different amounts down.

Remember to add in refinancing charges and fees in every case. Also factor in any prepayment penalties you may have to pay, as well as the cost of replacing any GAP Insurance on the new loan.

7.  Complete Your Application

Once you’ve decided on a loan, it’s time to fill out your application. Many lenders allow you to complete most of the loan application and approval process online. Before applying, you should take a little time to gather your financial information and important documents, including:

  • Proof of identity, address, and social security number
  • Recent pay stubs
  • Bank statements and details of other sources of income
  • Details about your major expenses and liabilities

Should I Refinance My Auto Loan?

By following these steps you might discover that your existing loan is worth more to you if you continue paying it. Or, you might also find that you are paying too much for your current financing. Let’s look at situations where refinancing makes sense and when it does not.

When to Refinance An Auto Loan

Everyone’s financial situation is different. Here’s when refinancing a car is more likely to make sense for you.

  • Improved credit score: You’ve improved your credit score significantly since you took out your existing loan and therefore can potentially unlock better interest rates.
  • Lower rates: Falling market interest rates since you took out your loan (or an unfavorable rate on your original loan) may make it worth refinancing.
  • Improved finances: If you’ve increased your income or reduced other expenses since you took out your original loan, you may be in a position to pay more on your loan
  • Cash windfall: If you’ve received or saved a lump sum you may want to use this as a down payment on a new loan to boost your ownership stake or improve your loan terms.
  • Shorten a loan: Longer loan terms are often uneconomical as most vehicles depreciate rapidly in value. Refinancing now may help stop your loan from going “underwater.”

When Not to Refinance One

A poorly planned refinancing can also make a difficult situation worse. Here are some red flags for when refinancing may not be the best option.

  • You’re near the end of your loan: Refinancing near the end of your loan term may not save you much and could extend your payment obligations.
  • Your loan is underwater: If you owe more on the loan than your car is worth, refinancing is likely to only worsen your situation.
  • Additional loan charges: Balloon and prepayment penalties are designed to make it more difficult to refinance a loan or to pay it off ahead of schedule.
  • Lower credit score: If your credit score has dropped you are likely to struggle to find better financing than your existing loan.
  • Higher interest rates: If rates have risen significantly from when you first secured your loan, you are likely to find it challenging to refinance at a better rate.

Best Reward Federal Credit Union: Your Car Refinance Home

An affordable vehicle is essential to help get you where you want to go in life. At Best Reward Federal Credit Union, we work hard to give our members more auto financing options.

We offer:

Contact us today, or click below to learn how you can get more out of your auto loan.

Car Loan Refinancing Options