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How to Refinance an Auto Loan

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Brian O'Connell

Brian O'Connell

Updated August 9, 2021
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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!
In times of lower interest rates, you may start to wonder about whether you should refinance your auto loan.And why not? According to 2020 data from RateGenius, money saved with a new auto loan is at an all-time high. Auto loan refinancing deals saved borrowers $989.72, on average, in 2020.With that much cash up for grabs, it’s no wonder that auto refinancing loans are in big demand. Key strategies for auto owners who want a good refinance loan experience include being prepared and making sure to understand all the details—because the lender sure will. Read on for information that may help.

Why Refinance an Auto Loan? 

When you refinance an auto loan, you’re essentially securing a new auto loan. You use the new loan to pay down the balance of the original car loan. That all takes time, effort, and money (for 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.So when should you refinance your auto loan? The fact is, vehicle owners refinance their auto loans for a variety of reasons that can all be worthwhile, depending on the situation.Most often, car owners refinance their loans to achieve the following personal financial goals.
  • 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. 
Also recommended: If you’re new to the world of auto finance, learning some auto loan terminology may help. 

Clearing Auto Refinancing Loan Hurdles

Where does a borrower start with the auto loan refinancing process?Ideally, with a good grip on what a refinancing deal has to offer. Auto loan consumers are best off when they fully understand the entire refinancing. It can help to make sure you have answers to these questions:
  • 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 

With that prep work complete, now it’s time to figure out the best path to a good auto refinance loan.Get the job done right with these action steps.

1. Get Your Documents in Order

Start the auto loan refinancing process with some data-gathering. To file a loan application, you’ll typically need these documents.

Your 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 

Your 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.

Your 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. 

Your 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. 

2. Start Looking for Good Deals 

Kick off your auto loan refinancing deal by listing what you want from the loan, such as a lower interest rate, no or low fees, a streamlined application process, and solid customer service. Having a candid conversation with your current financial institution is also a good step to take since it may give you an idea of what kinds of loans you could qualify for. And as you look for refinancing loans, remember that you may also want to explore online auto loan refinancing options, since they tend to have fewer fees and competitive rates.

3. Apply for the Loan 

When you’ve found the loan you want, follow the instructions to apply. 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, 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 
Once you complete the application, review it thoroughly to confirm that the information is accurate and up to date. Any discrepancies or missing information may lead to a loan rejection. And know that the lender will likely perform a credit check.

4. Shift to Your New Loan

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. It is, however, a good idea to confirm with your original lender that the auto loan was paid off and you don’t owe any more payments.After that, be sure you pay the new loan on time and start enjoying the savings from your refinanced auto loan.

The Takeaway

Whether you simply want to get an auto loan with more favorable terms or you’re looking to adjust your car loan repayment period, refinancing your auto loan allows you to take advantage of lower rates, put more cash in your pocket, and get a loan that meets your unique personal financial needs.Handled correctly, refinanced auto loans can be a big win-win for vehicle owners, who can gain an auto loan with better terms and potentially save money in the process.When you’re ready to start looking for auto refinancing loans, Lantern by SoFi can help. Fill out one simple form you can use to compare and contrast.
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.SOLC0521084

Frequently Asked Questions

How do I refinance my auto loan?
How hard is it to refinance a car?
Do you need a down payment to refinance a car?
Can you refinance a car loan online?
Can you be denied for a refinance?

About the Author

Brian O'Connell

Brian O'Connell

Brian O’Connell is a freelance writer based in Bucks County, Penn. A former Wall Street trader, he is the author of the books CNBC's Creating Wealth and The Career Survival Guide. His work has appeared in multiple media platforms, including TheStreet.com, Bloomberg, CBS News, Yahoo Finance, and U.S. News & World Report.
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