How to Refinance a Car — Everything You Need to Know

How to Refinance a Car — Everything You Need to Know
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Point Editorial

The best way to refinance your car depends on several factors, like the value of your vehicle, the balance left on your loan, your financial situation, and your credit score.

Always take a closer look at your loan terms to see if you might benefit from current market prices. 

How does refinancing a car work?

When you refinance your car, you’re replacing your current auto loan with a new one. 

Part of the new auto loan helps you close the books on your old loan. You then become liable for the balance on the new loan. If you time it correctly, you can end up with better terms and save money. 

Why refinance a car?

Refinancing your car loan might be a good idea for several reasons. Here are some benefits to keep in mind:

  • Lower annual percentage rates (APR). You win if interest rates have dropped since you first took out your loan, which might be the case if you got your original financing from a dealership.
  • Lower monthly payment. Maybe you need some wiggle room in your monthly budget. By spreading your debt over a longer term, your monthly car payments drop (but you’ll pay more interest on the life of the loan).
  • Pay off your debt sooner. On the other hand, if you have the extra cash up front, you can renegotiate a shorter term to save on interest.
  • Get cash for your equity. If you own most of your car, you might be eligible for a cash-out refinance loan. You trade your equity for money in hand.

Is refinancing good for you? 

Here are some questions you should ask yourself to find out if refinancing is the right choice:

Does your current loan have a prepayment penalty?

Some lenders charge a penalty when you pay back your debt before the end of your term. If that’s the case, it might not be worth it.

Are you underwater?

You’re “underwater” if your remaining loan amount is higher than the current value of your vehicle. Being underwater makes it harder — or impossible — to refinance.

How old is your vehicle?

Some lenders won’t refinance older or high-mileage vehicles.

Are you behind on your payments? 

You should be up-to-date on your car payments before negotiating a better deal.

How to refinance a car?

Follow these steps to refinance your vehicle loan:

Check your credit score

The first thing to do is review your credit history and check your credit score. A better score improves your chances of getting a better deal. 

The three major credit bureaus — Equifax, Experian, and TransUnion — each allow one free copy of your credit report every year. You can get all three at AnnualCreditReport.com

Collect the necessary documents

Here’s what you need to refinance your car: 

  • Proof of identity
  • Driver’s license
  • Proof of income
  • Proof of residence
  • Vehicle registration and information (including VIN)
  • Credit and banking history
  • Proof of insurance
  • Information for your current loan

Compare offers 

Pre-qualification results in a quote without a check on your credit report. Try to get pre-qualified by as many different lenders as possible. The terms may be subject to change, but you’ll get an idea of the market.

For lenders that don’t offer pre-qualification, you’ll have to fill out an application to get information on interest rates. If you fill all your applications within 14 days, it’ll only count as a single credit check. 

Look at the interest rate, repayment terms, and fees. Compare the new quote to your existing loan terms until you find the best one. After double-checking all the terms and reading the fine print, you’re ready to sign off on the deal. 

Pay your old loan and set up automatic payments 

Often, the new lender will handle paying off your old loan, but get confirmation from your current lender before you stop making payments.

Once you’ve closed your old loan, set up automatic payments on your new one. A history of timely payments on your auto loan helps improve your credit.

When is the time to refinance your car?

Here are some signs it might be time for an auto loan refinance:

  • Your credit score increased. A better score often equals better rates.
  • Lower interest rates. Markets fluctuate — and auto loans are no exception. If you can get better rates, you should.  
  • Your monthly payment is too high. Lower rates and long terms can lead to lower payments and help reduce the strain on your monthly budget.

On the other hand, if any of the below situations apply to you, it might be better to wait.

  • Your credit score has decreased. A lower score will make it harder to negotiate, so check your credit history 
  • You just got your loan. You might already have the best terms.
  • Your current loan charges a prepayment penalty. A penalty could outweigh the benefits of refinancing. 
  • Your car is more than eight years old or has more than 100,000 miles on it. Older, used vehicles aren’t always eligible for refinancing.
  • You’re underwater on your loan. If your loan balance is higher than the value of your vehicle, you may not be able to refinance. 

FAQs about refinancing a car

How long should I wait to refinance my car? If not now, then when? 

Instead of waiting for the perfect conditions, it’s best to be proactive about your finances. The first step is to make a balanced budget and get your personal finances in order.

Does my car qualify to be refinanced?

To determine if your car is eligible for refinancing, lenders calculate the car’s loan-to-value (LTV) ratio. Usually, only LTV ratios below 125 percent can qualify. To calculate your vehicle’s LTV, divide the current loan balance by the car’s value (which you can check online at CarGurus.com, AutoTrader.com, Cars.com, and others).

Is refinancing my car bad for my credit score? 

Whenever you apply for a loan, lenders perform a hard inquiry on your credit report, which briefly knocks your credit score by a few points until your loan payments start going through. If you cluster all of your loan applications within 14 days, it only counts as one inquiry.

How long does it take to refinance a car?

If you follow the steps outlined above, refinancing shouldn’t take longer than getting your original loan.

How much does it cost to refinance a car?

If you’re lucky, refinancing won’t cost you anything and will even help you save money. Shop for lower rates and check for prepayment penalties to make the most out of refinancing.

The bottom line

Taking control of your finances can be a challenge, so it’s essential to put all the chances on your side. 

If you’re ready to make your money work for you, try PointCard™.

A transparent, easy-to-use alternative payment card, PointCard allows you to spend your own money while also receiving exclusive benefits, including unlimited cash-back on all purchases and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shop purchases. 

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