How to Refinance an Auto Loan

Why Refinance an Auto Loan? 

• To Lower Monthly Auto Loan Payments: Getting a new auto loan at a reduced interest rate can cut monthly payments down, leaving more cash in the till for other household expenses.

• To Get a Lower Interest Rate: Depending on the loan, a car owner may also be able to save money over the lifetime of the loan by getting a reduced interest rate. Take a vehicle for which the original loan was $25,000 and the refinance loan is $21,000. For a 60-month loan where the interest rate is cut from 7% to 5%, for example, the refinancing could save approximately $6,000 over the life of the loan.
• To Shorten the Loan Term: Car owners who are cash flush may shorten their loan terms to pay off the car faster, thus saving significant cash with lower interest rate payments.
• To Extend the Loan Term: Car owners who need some financial breathing room after a job loss, an injury or illness, or a divorce or other issue can extend the term of the loan to reduce monthly (but not overall) loan costs.
• To Get Some Extra Cash: If you have enough equity in your car, you might be able to take out a refinance loan that’s more than what you owe. That way you could get cash in hand, too. This is called a cash out car refinance. But realize that if you opt for this kind of refinancing, you will still have to pay back both the car loan and the extra money. 

Clearing Auto Refinancing Loan Hurdles

• Do You Meet the Lender’s Financial Requirements? While each bank or lender has its own rules and regulations on auto refinancing, many banks have similar lending limits. For example, your auto usually must be less than 10 years old and have less than 125,000 miles on it. While the exact figures may vary from lender to lender, know possible vehicle restrictions heading into any refinancing deal.
• Are There Any Prepayment Penalties? It’s usually a good idea to pay off an auto loan as soon as possible. Doing so clears the debt and puts more money in your pocket. However, some financial institutions may stick you with a prepayment penalty if you pay off the loan early. Be sure to examine your existing loan contract for any prepayment penalties and factor them into your costs.
• Do You Know the Total Cost? Before green-lighting an auto loan refinancing deal, you need to know the full cost of refinancing the car. Make sure you know how much you’ll save per month and, even more importantly, over the life of the loan. When you refinance, you may be saving money on a monthly basis but adding more dollars to the overall cost of the vehicle. You’ll want to be sure you’re factoring any fees or penalties, too. A good auto loan refi calculator can be highly useful here.
• What’s Your Credit Score? Most lenders will expect a minimum credit score from potential borrowers. Typically, a FICO® credit score of 700 or more will get you the lowest loan rates on an auto refinancing loan. That said, a FICO score of 660 should ensure that you qualify for a standard auto loan refinancing deal .

How to Refinance an Auto Loan 

1. Get Your Documents in Order

Your Original Auto Loan

Your Vehicle Information

Your Auto Insurance Paperwork

Your Employment Records

2. Start Looking for Good Deals 

3. Apply for the Loan 

• Name
• Date of birth
• Email address and phone number
• Address
• Social Security number
• Driver’s license number
• Work status
• Your bank’s name, address, routing number, and checking account number (so the lender can deposit your loan amount, assuming it is not your bank)
• Your vehicle information
• Your auto insurance information 

4. Shift to Your New Loan

The Takeaway