How to Refinance an Auto Loan

Refinancing an auto loan involves replacing your vehicle loan with a new one. Depending on the situation, you may be able to get a lower interest rate or a different repayment plan. If you have decent equity in your car, you may even be able to access part of it in cash.

According to the credit bureau TransUnion, borrowers who refinance their auto loan save an average of $55 per month and cut their annual percentage rate (APR) by 3%. The refinance process is straightforward.

We’ve researched what to consider before you start and the steps to complete the process.

In this guide:

• Why would you refinance an auto loan?
• How to refinance an auto loan
• How much does it cost to refinance an auto loan?
• How long do I have to wait to refinance an auto loan?
• Pros and cons of auto loan refinance
• Should I refinance my auto loan?
• FAQ

Why would you refinance an auto loan?

Potential benefits to refinancing your auto loan include the following:

• Lower interest rate: If your credit has improved since you took out your loan or interest rates are lower, you may qualify for a lower APR, which can also reduce your monthly payment. According to TransUnion, 75% of borrowers who refinance do so to get a lower payment. 
• Different monthly payment: If you can afford a higher monthly payment and want to shorten your loan term, you might be able to secure a lower interest rate on your loan. Extending your repayment term can result in a lower monthly payment—but it can also result in paying more interest.
• Get cash out of your vehicle: If you have sufficient equity in your vehicle, you may be able to use it to access cash. Certain auto lenders allow you to borrow as much as 130% of your vehicle’s retail value. If your credit score is solid, this option may be less expensive than a personal loan or credit card.
• Remove a cosigner: If you applied for your loan with a cosigner to improve your approval odds, refinancing removes them from the loan. This action takes the debt off their credit report and removes their responsibility to make payments if you can’t.

Carefully consider your situation and goals to determine whether refinancing is right for you.

How to refinance an auto loan

We’ve researched the steps you can take to prepare for an auto loan refinance and to ensure you get the best deal available.

1. Review your current loan details

Before you start shopping around, it’s important to know what you already have. Then you can assess your situation and determine whether refinancing is the right move. Start by logging in to your online account with your auto lender and locating the following details:

• Remaining balance
• Interest rate
• Remaining number of payments
• Monthly payment amount

Note: Most auto refinance lenders have a minimum loan amount, which can range from $3,000 to $7,500. If you owe less, refinancing may not be an option.

2. Estimate the car’s value

Lenders use your car’s retail value and your proposed loan amount to help determine your eligibility and the loan’s interest rate. You can estimate that value using websites such as Kelley Blue Book or J.D. Power. 

You may have a hard time finding a lender to refinance your loan if your vehicle is older than 10 years or has over 100,000 miles—actual requirements can vary by lender.

3. Evaluate your credit and financial health

When you apply for an auto loan refinance, lenders will review your credit history, income, and debt to determine your eligibility and loan terms. 

To get an idea of their evaluation, use a free credit monitoring service to access your credit report. For example, you can access your credit reports from Equifax and TransUnion for free through AnnualCreditReport.com.

You don’t need perfect credit to get approved for an auto loan refinance, but your best bet to secure better terms is to have a credit score in the 700s. Also, look for potential issues on your credit reports you can address.

It’s wise to calculate your debt-to-income ratio (DTI), which involves adding up your monthly debt payments and dividing the sum by your gross monthly income—that is, before taxes and other deductions. You may be able to get approved with a DTI of up to 50%, but you’ll likely get a lower interest rate if your ratio is below 35%.

4. Get prequalified with multiple lenders

Getting prequalified allows you to get quotes for interest rates, repayment terms, and monthly payments without a hard credit check, which affects your credit score. Certain auto lenders offer this commitment-free feature, but not all. Several websites allow you to prequalify with multiple lenders at once.

Getting prequalified with three to five lenders allows you to compare the best auto refinance rates and ensure you get the best one available. 

As you go through this process, check with your current lender to see whether you can refinance the loan with it. Certain lenders will, but others may only refinance loans from other lenders.

Why would the terms of my loan change after prequalification?

Keep in mind that prequalification doesn’t guarantee approval or the terms in the quote. The offers you see are based on basic information about you—a soft credit check doesn’t give lenders a full picture of your credit profile, and the lender doesn’t yet have your income information yet.

For example, if the lender performs a hard credit check, and your credit score is lower than you estimated or you have a high debt-to-income ratio (DTI)—the percentage of your gross monthly income that goes toward debt payments—your final offer may not match your quote. 

A relatively low DTI and blemish-free credit profile can help improve your odds of the final offer matching your initial quote. 

5. Submit an application

Now that you’ve shopped around and found the best offer, you can apply with the lender of your choice online, over the phone, or in person if it’s a local financial institution.

You’ll need to provide basic information about yourself, as well as documentation. Requirements can vary by lender, but information and documents you may need include:

• Name
• Birthdate
• Social Security number
• Address
• Email address and phone number
• Driver’s license or other government-issued photo ID
• Proof of residence
• Proof of employment and income (such as pay stubs, W-2, or bank statements)
• Vehicle identification number
• Vehicle registration and mileage
• Payoff details for your current loan
• Proof of insurance coverage

After you submit everything, getting approved and closing often takes just a few days. However, you may run into delays if you don’t provide all the necessary documentation. 

In many cases, you can close the loan agreement via electronic signature, but specific lenders may require you to close in person. Ensure you read the contract and watch out for important details, such as your first due date, a potential prepayment penalty, late fees, and insurance requirements.

6. Set up automatic payments on your new loan

Once you’re approved and sign the contract, your new lender will pay off your old loan and handle the transfer of title. Keep paying the old loan until you confirm it’s paid in full. If you overpay, the lender should issue a refund.

Once the refinance is complete, we recommend logging in to your account with the new lender and setting up autopay, so you don’t miss any payments.

If you applied for a cash-out auto refinance, you’ll often get a check or a deposit into your bank account for the difference.

How much does it cost to refinance an auto loan?

Most lenders don’t charge upfront costs to refinance an auto loan. However, you may get a prepayment penalty from your current lender if you pay off your loan before a specific date outlined in your loan agreement.

These penalties are allowed in 36 states on auto loans with terms of 60 months or less. If your loan has a penalty, it can cost around 2% of your remaining balance. Review your contract for a prepayment penalty, and compare the cost to your potential savings.

For example, if you want to refinance an auto loan with a $20,000 balance, but your lender charges a 2% prepayment penalty, your charge will be $400. 

Example scenario
Auto loan balance	$20,000
Time left to repay	24 months
2% prepayment penalty	$400 ($20,000 x 2%)
Refinance savings (per month)	$25
Length of refinance payoff	24 months

You’ll save $600 on monthly payments after the finance—$25 x 24 months. But after the $400 penalty, your savings drops to $200. Consider the time to research and compare options when determining whether the savings is worth it to you.

How long do I have to wait to refinance an auto loan?

There’s no waiting period after you take out an auto loan before you can refinance it. However, it’s often best to wait at least six months to give your credit score time to rebound from the temporary decrease applying for a loan can cause.

Even after six months, refinancing only makes sense when it can help you accomplish your goals, whether it’s to save money, change your monthly payment, get cash out of your equity, or remove a cosigner.

Before you get started on the process, know your situation and goals to determine whether refinancing is the right choice.

Pros and cons of auto loan refinance

As you consider whether refinancing is right for you, it’s important to understand the advantages and disadvantages.

Should I refinance my auto loan?

The decision to refinance an auto loan is personal, so evaluating your situation and researching your options is essential to determine the best path forward. Before you get started, consider the factors below:

• Has your credit improved since taking out your current loan?
• Have market interest rates gone up or down in the meantime?
• How much time do you have left on the loan? 
• What are the current loan amount, interest rate, and monthly payments?
• Does your current loan have a prepayment penalty?
• What is your vehicle’s age and mileage?

We’ve researched whether it might make sense to refinance and when a borrower might reconsider refinancing.

When to refinance	When to reconsider
Your credit score and income have improved.	Your credit score and income have decreased or remained the same.
You have more than 2 years left on your loan.	You only have 2 years left on your loan.
Your vehicle is newer and has low mileage.	Your vehicle’s age and mileage exceed lender minimums.
You aren’t planning to apply for a mortgage in the near future.	You’re thinking about buying a home and getting a mortgage soon.
Your current loan has no prepayment penalties.	Your current loan has a prepayment penalty that neutralizes your potential savings.
You have sufficient equity and want to access it.	You owe more than the vehicle is worth.

FAQ

Can you refinance an upside-down auto loan?

It’s often best to avoid refinancing a car loan if you owe more than it’s worth. But if you’re upside down on your current loan, which is more common at the beginning of your loan term, refinance is still possible. Certain lenders allow you to borrow up to 130% of the car’s value. 

This could allow you to adjust your monthly payment. However, getting a lower interest rate may be challenging, and you might consider taking out gap insurance to cover the difference in case your car is totaled.  

What are the requirements to refinance an auto loan?

Each lender has its criteria for determining eligibility and loan terms. In general, though, lenders will consider the following factors:

• Credit score: There is no standard minimum, but you’ll have a better chance of getting approved with favorable terms with a score in the 700s or higher.
• Debt-to-income ratio: You may get approved with a DTI of up to 50%, but try to keep it lower than 35%, if possible. 
• Vehicle information: Your car should be less than 10 years old and have fewer than 100,000 miles, but certain lenders may be willing to exceed those standard maximums. Check your vehicle’s title history for brands that could affect your eligibility, such as a rebuilt or restored title. A brand may not result in a denial, but it could limit how much you can borrow. If the car has a salvaged title, refinancing may not be an option.
• Loan-to-value ratio: Divide your loan amount by the vehicle’s retail value to get your loan-to-value ratio (LTV). A lower LTV can help you qualify for a better rate.
• Credit history: A history of missed payments could affect your ability to get approved, even if your credit score is decent. 
• Loan amount: Check for lenders’ minimum loan amounts to determine whether you have enough left on yours to qualify.

How does refinancing an auto loan affect my credit score?

Refinancing your car loan can affect your credit in several ways:

• Credit inquiry: Prequalification doesn’t often affect your credit score. But when you submit your application, the lender will run a hard inquiry on your credit reports, which can reduce your score by several points. 
• New loan account: Opening a new loan will reduce your average age of accounts, which can affect your length of credit history. 
• Loan amount: If you get a cash-out auto refinance, your new loan amount will be higher than the old one, which affects the second-most influential factor in your FICO score: how much you owe.

Remember: These impacts tend to be short-term, and as long as you make your payments on time, an auto refinance can help improve your credit in the long run. 

Can I refinance an auto loan if I have bad credit?

Yes, it’s possible to refinance your auto loan if you have bad credit. However, you may have higher interest rates and other undesirable terms. 

If you’re interested in refinancing, check out the best auto loan refinance options for bad credit to ensure you get the best offer.

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