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How to Refinance an Auto Loan: 6 Tips You Should Consider

How to Refinance an Auto Loan; Learn how to refinance your auto loan so you have everything you need before you talk to a new lender. Find out more from Lantern by SoFi today!
Nancy Bilyeau
Nancy BilyeauUpdated March 6, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Your car loan is demanding a chunk of your paycheck. Sooner or later, you’re likely to ask yourself, “Could I save money by refinancing my loan?”And who could blame you for wondering — especially if interest rates are low and some auto loan refinancing deals are reportedly saving borrowers hundreds of dollars a year.What’s important is to pursue a deal for the right reasons — and to make sure you’re avoiding costly mistakes. These tips for refinancing auto loans will help you make the smartest decisions.

What Is Auto Loan Refinancing?

When you refinance, you're essentially securing a new loan to pay down the balance of an original car loan. That all takes time, effort, and money (for the loan applications and servicing fees). That’s why you should be sure you have a good reason before you go to the trouble of taking out an auto refinancing loan.Ideally, your car is holding its resale value, a fact you can look up yourself. If your car's value is lower than what you owe on it, refinancing may not be a good option. Older cars could be problematic, because no matter how well you’ve maintained it, a car depreciates in value over time.What’s also important is to understand how car loans work. If you extend your loan term or take cash out of your equity, you could wind up owing more than what your car is worth. This is called being upside down on your car loan. If you have to sell the car, you’ll need to pay the lender the difference. Clearly this is to be avoided.

How to Refinance an Auto Loan 

With a refinancing, just as with your original deal, there are very particular car loan requirements.Once your application is approved, your new auto loan provider will pay off your old auto loan or give you the funds to do so, and become your auto loan manager. Future payments will go to the lender who handles your refinanced loan.

6 Tips for Refinancing an Auto Loan

You may be itching to get going and grab that hot refinance deal. These tips to refinance auto loans will help you avoid the pitfalls and ensure the process goes smoothly. 

1. Compare Your Options

Kick off your decision-making process with this first auto refinance tip: List everything you desire from the new loan. It could be a lower monthly payment, a better interest rate, no or low fees, a streamlined application process, or solid customer service.Now take a look around. You can start with the bank you already use for other services. Some financial institutions offer discounts on interest rates for their customers.  Compare the rate offered by your current bank with rates from other lenders. Some people like to get prequalified with at least three lenders for comparison’s sake.As you survey the refinancing landscape, remember that you may want to prioritize online auto loan refinancing options, since they tend to have fewer fees and competitive rates.

2. Determine When the Right Time Is for You to Refinance Your Car Loan

This bears saying again. Figuring out when you should consider refinancing a car is key.  People pursue a refinance for all kinds of reasons — and they may all seem like great reasons. But timing is everything. One of the most important refinancing tips is to make sure this is the best possible moment for you to pursue a deal. Let’s take a closer look at the top reasons people refinance their auto loan:

To Get a Lower Interest Rate

One of the chief benefits of refinancing a car is for the owner to save money over the lifetime of the loan through 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 less paid in interest over the life of the loan.

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 family issue can extend the term of the loan to reduce monthly (but not overall) loan costs. You will still have to pay the whole amount.

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. 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. 

3. Get the Paperwork Ready First

So you’ve done the research, taken a look at the financial institutions, and decided the time is now. But before taking the plunge, assemble your documents. It will make everything go much more smoothly.

Original Auto Loan

Lending institutions will require the original loan paperwork to process a new loan. The original loan paperwork should include the loan amount, the monthly payment, the interest rate, the payoff number, and the up-to-date loan balance 

Vehicle Information

Auto loan providers will also ask for your current vehicle information (think a Carfax for your own vehicle.) This document should include the vehicle’s make, model, year, mileage, and vehicle identification number.

Auto Insurance Paperwork

Make sure you have your car insurance records, including type of insurance and the amount of the insurance included in the policy. Auto lenders won’t make a loan to an uninsured or significantly underinsured vehicle owner. That’s because the lender has a stake in the vehicle, as well. If the car is damaged or totaled, your lender will want to know it was properly insured. 

Employment Records

Your auto loan refinancing lender may also ask for proof of income and employment, to ensure you have the means to repay the loan. 

Personal Stats 

In addition, a typical auto refinancing loan application likely includes the following:
  • Name
  • Date of birth
  • Email address and phone number
  • Address
  • Social Security number
  • Driver’s license number
  • Work status
  • Your bank’s name and info

4. Pay Attention to the Details

Eyes on the prize doesn’t mean you forget to do due diligence on the nuts and bolts of your refinance. Of all the tips on refinancing a car, this one will keep you from losing money.Before green-lighting an auto loan refinancing deal, you need to know how much it costs to refinance a car. Make sure to nail down how much you’ll save per month and, even more importantly, over the life of the loan. With an older vehicle depreciating in value, refinancing might not be the wisest course. Watch out for fees. Auto refinancing can carry with it costs ranging from the application fee to title transfer fees. Not all lenders will sock you with a lot of fees.One of the most crucial tips for refinancing your car loan is to search hard for any penalties. In particular, scour the lender’s agreement for 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 of up to $500 if you pay off the loan early.

5. Prepare for a Hit on Your Credit Score 

This auto refinance tip is a reality check. Refinancing an auto loan, like any other kind of refinance, has the potential to lower your credit score temporarily. This is due to the fact that it usually requires a hard pull credit check and also to the fact that you are replacing an older loan with a newer one. When you apply for loans, each lender you apply with will request a credit check that causes a hard inquiry to be entered on your credit report. This can cause a small reduction in your credit score. If you qualify for and accept a loan offer, you'll typically see another score dip.Remember, prequalifying for the loan you’re interested in can reduce the number of hard inquiries.

 6. Have a Backup Plan 

What if you found a refinance deal you really wanted, applied, but were declined? You could consider applying through a different type of lender. (Online lenders are typically easier to qualify for.) Or your plan could be to work on building your credit for a year and then apply again. Aside from the foundation of paying your bills on time, you could pay your credit card balances strategically and dispute the problems on your credit report.

Typical Requirements to Refinance

It might help you improve your chances of finding a good refinance deal by getting familiar with what the lenders are looking for:

Strong 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.

History of On-Time Payments

The lenders will look at how well you did with paying off your existing loan. If you’ve failed to make payments on time, that won’t help your cause seeking refinance.

Improvement in Circumstances

Lenders generally like to see an increase in income or some other quantifiable measuring stick that signals you are worth a lower interest rate.

Compare Auto Loan Refinancing Rates With Lantern

When looking to refinance, most people want to take advantage of lower interest rates, put more cash in their pocket, or get a loan that better meets their financial needs. These auto refinancing tips have hopefully helped you make the right decision for you. With Lantern by SoFi, you can compare rates to refinance your auto loan.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC0521084

Frequently Asked Questions

What does it mean to refinance an auto loan?
How do you refinance an auto loan?
What are some tips for refinancing an auto loan?
When might you consider refinancing your car loan?

About the Author

Nancy Bilyeau

Nancy Bilyeau

Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.
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