How to Refinance a Car Loan

Monthly auto loan payments can be a heavy weight to bear when you’re paying down debt on a budget. Refinancing your car loan could help.

First, it’s essential to understand how auto loan refinancing works and how to refinance properly. If you know what you want and what the rules are, you are less likely to get scammed.

Here, we review the basics of refinancing a car loan, from making the decision to signing the paperwork and beyond.

Table of Contents:

What does it mean to refinance your car loan?

At its most basic, auto loan refinancing can be defined as getting a new car loan that has different terms than your current loan. This can usually be done with the same lender or a different lender.

Why refinance your auto loan?

Most consumers considering refinancing their car loans are doing so because they find their monthly payments difficult to manage. However, refinancing won’t fix everything about your budget.

So, what are the pros and cons?

Auto refinancing pros

You could lower your interest rate. This is one of the most common things auto loan borrowers want to change.

Especially if your credit has markedly improved since you borrowed your original loan, you may be eligible for a lower interest rate. A lower interest rate could both reduce your monthly payments and reduce the total interest charges you will pay over time.

You could extend the term of your loan. Another way to reduce your monthly payment is to extend your loan’s term. For example, if you currently have a 5-year loan, a 7-year loan may result in more reasonable monthly payments.

You could increase your monthly cash flow. A lower monthly payment means higher cash flow. If you’re refinancing because you need more money to cover debt payments or other costs, a lower payment could help.

You may like your new lender better. You may simply want to refinance because you don’t like working with your current lender. Even if your payments don’t change, if your current lender is stressing you out, a new one may reduce your financial anxiety.

Auto refinancing cons

You could extend the term of your loan. This was also on the pros list—so which one is it? Well, it depends on your goals. A longer term can help you pay less per month, but it could also mean making monthly payments for much longer than you hoped.

You could pay more total interest. A longer term could also mean paying more total interest charges. The longer you are repaying what you borrowed, the more interest can be charged.

There may be extra costs. Some lenders charge refinancing fees. Consider these carefully before agreeing to the deal.

How to refinance your car loan in 4 steps

When you decide the pros outweigh the cons, you can start the auto loan refinancing process. It will take some time to do the proper research, but remember—it’s better to be safe than sorry you spent more money.

1. Compare rates

In the past, you may have had to call multiple lenders on your own, give out your personal information multiple times, and attempt to keep all the numbers straight so you can make an accurate comparison.

Thankfully, this is no longer necessary. There are multiple websites that only ask for your information once and then you can compare various offers. Start with Debt.com’s Loan Comparison service to see what refinancing offers top lenders could give you.

Thoroughly read through the potential offers before you choose a lender. You also want to be sure that all the companies you’re reviewing are legitimate and properly accredited. Debt.com only works with accredited lenders, so using the loan comparison tool can help you avoid scams.

2. Choose a lender

After reviewing lenders and possible loan terms, you can reach out to the one that seems like the best fit for you. A representative will speak with you about the loan and what they can really offer you.

They will likely ask you for more personal information to determine your refinancing terms more accurately. When you give them more personal information, the lender will conduct a hard inquiry of your credit.

This can negatively affect your credit score, but it won’t last long. New inquiries only account for 10% of your credit score calculation.

A hard inquiry allows the lender to solidify their judgment of your creditworthiness and determine the rate and terms they can actually offer you. This may or may not match up with what you saw on whichever loan comparison site you used.

3. Ask more questions

Now is the time to raise any important questions with your lender’s representative before it’s too late. Some important things to include:

• Is there a prepayment penalty? In other words, will I be charged for making larger payments than required or paying off the loan early?
• Do you charge refinancing fees? If so, how are they calculated?
• How flexible are the terms? What happens if I have trouble paying?

Even if you feel like you’ve covered all the bases, request the offer in writing and read through it thoroughly. It may be boring, but you might just find something that causes you to rethink your next move.

4. Sign the paperwork

After doing your research, choosing a lender, and asking extra questions, you should be ready to commit. Speak with the lender’s representative and let them know you are ready to sign.

You may sign online with a secure e-document service, or you could go into a physical office. It depends on your lender and your personal preferences.

Last but not least, make on-time payments! You’re refinancing to improve your financial situation. Missing payments will only hurt it.

If you do end up having trouble making the payments, call your lender and explain your situation. They may be able to help you before you ever miss a bill.

What if I don’t qualify to refinance my car loan?

If your credit isn’t up to par, you may have trouble qualifying for a new auto loan. But that doesn’t mean it’s the end of the road.

Take steps to repair your credit if you’re still set on refinancing. You can start with Debt.com’s guide to repairing your credit.