What is Refinancing a Car?

Understanding Car Loan Refinancing

Refinancing replaces one auto loan with another on the same vehicle. The new loan would have different rates or terms from your old loan. Often, borrowers refinance with their existing lender, and checking with your lender is a good place to start if you think refinancing can help you save money on your car loan.

Refinancing isn't always available, and your vehicle and loan must fit into the lender's range to qualify. Typically, a vehicle must be less than 10 years old and have less than 100,000 miles on it to be eligible for refinancing. Additionally, your loan can't be too close to being paid off, or too large.

When Should You Refinance Your Car Loan?

There are several times when it might be a good idea to refinance, especially if rates have gone down or your credit has improved. This way, you're more likely to qualify for a lower interest rate, which saves you money overall on your loan. These are just two examples, however, of reasons you may want to refinance. Others include an improved financial situation, when you need to lower your monthly payments, or you need to remove a cosigner.

If you want to switch to a shorter loan, don't bother refinancing; just make higher payments to get your loan paid faster, as long as there are no prepayment penalties on your loan. This can save you fees and hassle while getting the same result.

You also shouldn't refinance too soon after taking on a loan. Typically, it's not recommended in the first two years of a loan. Be careful if you have a lot of negative equity, or if your lender charges exorbitant fees for refinancing, as these are also not good times to try to refinance your car.

Steps to Refinance Your Car Loan

There are several steps to take if you plan to refinance your vehicle, much like financing in the first place. Here are five simple steps to follow to get your car refinanced.

Step 1: Check your Credit Score and Current Loan

If you're thinking of refinancing, the first thing to do is see if your credit score has improved as a result of managing your auto loan. If your credit score has gone up, you may be a prime candidate to refinance your vehicle. You can check your credit score for free once a week by visiting annualcreditreport.com.

Make sure to also check your loan contract and be sure there are no stipulations or clauses that don't allow you to repay your loan early. Your loan gets paid off, and a new contract is started on the same car, so prepayment penalties can be hard to swallow if you're trying to save money.

Step 2: Compare Lenders & Offers

The first place to start when you're looking to refinance is with your current lender. Often, especially if you have a good relationship with your lender and your loan is in good standing, your lender may be willing to refinance your car. However, not all lenders have the ability to refinance. Therefore, you may have to visit another lender. But how do you know where to go?

This is where rate shopping comes in. Rate shopping is a technique used to compare prices on loans. To do this, you can apply for several loans of the same type, such as a car loan, with multiple lenders in a two-week period. This is known as the rate shopping window. During this time, multiple offers for the same type of loan will only ding your credit as one inquiry rather than multiple dings to your credit by shopping over a longer time.

Once you find the refinancing offer that best fits your needs, you can stick with that lender for your new loan.

Step 3: Gather Necessary Documents

Refinancing is just like filling out a new loan, and you will need all the same proof of ability, stability, and willingness to get your vehicle refinanced as you did the first time around. This means you need to bring in proof of residency, proof of income, a valid driver's license, proof of insurance, your vehicle information, and your current loan statement. You will also need to provide the lender with your account number on your loan and your lienholder information.

Step 4: Apply for Refinancing

Once you have all your documents in hand, you can apply for refinancing with your lender or a new lender. The dealer will take your documents, pull your credit, and let you know what kind of rates and terms you're approved for.

Step 5: Finalize the Refinancing Process

Finally, you can sign your contract and drive off in your newly refinanced car. The process is very much like the original loan process, except you're just keeping the car you have instead of getting a new one.

Pros and Cons of Refinancing a Car

Refinancing comes with both benefits and disadvantages, depending on your situation. Let's look at some pros and cons associated with refinancing a vehicle.

The benefits of refinancing a vehicle include getting a lower monthly payment by refinancing to a longer loan term. Lower interest rates by refinancing once your credit score has improved, and better terms, such as a new payment date, which works better for you. In some cases, you can even do a cash-out refinancing, which gives you some money back to put into other things.

On the flip side, some lenders charge high fees for things like refinancing, and a lender will typically pull your credit report, causing a temporary drop in your score. You may also be refinancing to a longer loan term, which means paying more in interest charges overall. Refinancing can also lead to the loss of equity, especially if you do a cash-out refinancing. If you're not careful when you refinance, you may end up with worse terms on your new loan, and this is never the point of refinancing.

How to Qualify for the Best Auto Refinance Rates

To qualify for the best rates and terms you can when refinancing, it pays to have a good credit score – or at least an improved one. Even if your credit score doesn't hit the "good" credit score range, having a credit score that has improved since you first took out your loan will help. Lenders like to see credit scores go up as a result of proper loan management over time.

Another way to ensure that you get the best terms you can is to rate shop. Rate shopping means applying for multiple loans of the same type (like a car loan) in a short time, typically two weeks. When you do this, lenders understand that you're looking to compare rates, and your credit score, though still impacted, isn't dinged as much as if you were to stretch out your search for a loan.

FAQs

Does refinancing a car mean starting over?

Technically, refinancing starts you over from the current value of your vehicle; it's not a complete do-over, but it does reset some of your terms, like the length of the loan and the interest rate. The time you've already spent financing your vehicle will not be wasted, and how much you've already paid is taken into account along with the current value of the vehicle.

Does refinancing a car hurt your credit?

Much like getting a new loan, your credit score will be impacted when a lender looks at it to determine whether you can refinance. The credit pull results in a minor drop in credit, typically between 5 and 15 points. This is usually temporary, and your score should recover quickly.

How soon can you refinance after buying a car?

It's not a good idea to refinance right away, and lenders usually prefer to refinance vehicles that have already been financed for around a year or two. This is not a hard and fast rule, and how soon you may actually qualify for refinancing can depend on your situation. Though if you repeatedly try to refinance unsuccessfully, you will end up hurting your credit score further and may jeopardize your chance at another loan in the future.

Are there any fees for refinancing?

Yes, there are typically fees for refinancing. You are likely to see application fees, title transfer fees, and loan origination fees, along with title transfer fees and possible pre-payment penalties on your new loan. Some lenders also charge vehicle inspection fees and document fees, and it's possible that your original loan may contain an early termination fee. In order to make refinancing as worthwhile as possible, it's a good idea to find a lender that charges fewer fees.

Does refinancing a car save money?

Refinancing can save you money if you switch to a lower interest rate, but if you simply refinance to a longer loan term without getting a lower interest rate, you will pay more overall on your loan.