What is car loan refinancing: the full guide

Car loan refinancing is a financial strategy that involves replacing your existing auto loan with a new one, typically with more favorable terms. This process allows borrowers to potentially reduce their interest rate, lower monthly payments, or adjust the length of their loan term.

When you refinance your car loan, you’re essentially taking out a new loan to pay off your current one. The new loan may come from a different lender or even your current lender, but with different terms. This can involve changes to your interest rate, loan duration, or both.

There are several reasons why someone might consider refinancing their car loan. For instance, if interest rates have dropped since you first took out your loan, refinancing could help you secure a lower rate. Alternatively, if your credit score has improved, you might qualify for better terms.

Some people refinance to lower their monthly payments by extending the loan term, while others might want to pay off their loan faster by shortening the term.

In this guide, we will present you the 6 steps on how to refinance your car loan in the cheaper way. Keep reading!

6 Steps to refinance your car loan in the cheaper way

Let’s see the step-by-step to get the best available deal for your current situation.

1. Check your credit score

Begin by obtaining your current credit score. Your credit score plays a crucial role in determining the interest rates and terms you’ll be offered. You can get a free copy of your credit report from each of the three major credit bureaus once a year at AnnualCreditReport.com.

Pro Tip: If your credit score has improved since you took out your original loan, you’re more likely to qualify for better refinancing terms. If your score has decreased, consider working on improving it before applying for refinancing.

2. Gather necessary documents

Collect all the documents you’ll need for the refinancing process. This typically includes proof of income (pay stubs or tax returns), proof of residence, your current auto insurance policy, and details about your existing car loan (including the remaining balance, interest rate, and term).

You’ll also need information about your vehicle, such as the make, model, year, and Vehicle Identification Number (VIN).

Pro Tip: Create a digital folder to store scanned copies of these documents. This will make it easier to quickly submit them to multiple lenders if needed.

3. Compare loan rates

This is the most important step in the whole process! Researching and comparing offers from multiple lenders is the only way to get a good deal.

To save time doing so, use our Loan Finder. It’s totally free and you can see the conditions of leading lenders in a few clicks. Besides interest rates and loan terms, remember to look at any fees associated with refinancing and customer service ratings.

Consider what’s most important to you – lower monthly payments, shorter loan term, or overall savings on interest.

Pro Tip: So far, in our comparisons, Upstart has shown better conditions with a reasonable minimum credit score. Take a look into their conditions and see if they fits your needs.

4. Apply for pre-qualification

Many lenders, Upstart included, offer pre-qualification, which allows you to see potential rates and terms without affecting your credit score. This process typically involves providing basic information about yourself and your vehicle. Pre-qualification can help you narrow down your options before submitting a formal application.

Pro Tip: You can apply for pre-qualification with several lenders within a short time frame (usually 14-45 days). Credit scoring models typically count multiple inquiries for the same type of loan within this period as a single inquiry, minimizing the impact on your credit score.

5. Submit a formal application

Once you’ve identified the best offer based on pre-qualification results, submit a formal application to that lender. This will involve a hard credit inquiry, which may temporarily lower your credit score by a few points. Be prepared to provide all the documents you gathered in step 2.

Pro Tip: Double-check all information on your application before submitting. Errors or inconsistencies can slow down the process or even result in a denial.

6. Review and accept the offer

If approved, carefully review the terms of the new loan offer. Make sure you understand the new interest rate, monthly payment, loan duration, and any fees involved. Compare these terms to your current loan to ensure that refinancing will indeed benefit you financially.

Pro Tip: Don’t hesitate to ask the lender for clarification on any terms or conditions you don’t fully understand. It’s crucial to have a complete understanding of the new loan before accepting it.

By following these steps, you can navigate the car loan refinancing process effectively, potentially saving money and improving your financial situation. Remember, the goal is to secure terms that are better than your current loan, so don’t feel pressured to accept an offer if it doesn’t provide significant benefits.

Options for Refinancing with Poor Credit

Refinancing a car loan with poor credit is possible, but it comes with challenges. Lenders typically require a credit score of at least 640 for refinancing, though some may work with scores as low as 580. For those with credit scores below 580, options become much more limited.

While refinancing with bad credit is feasible, it’s often more expensive. Interest rates for borrowers with poor credit can be significantly higher – sometimes 10 percentage points or more above rates for those with excellent credit. This means your monthly payments and total interest paid over the life of the loan could increase substantially.

For those unable to meet minimum credit requirements, there are still potential options:

• Adding a co-signer with good credit;
• Securing the loan with additional collateral;
• Exploring lenders that specialize in bad credit refinancing;
• Waiting and working to improve your credit score before applying

It’s important to carefully weigh the costs and benefits of refinancing with poor credit. While it may provide short-term relief through lower monthly payments, the long-term costs could outweigh the benefits due to higher interest rates.

Getting Preapproved for a Car Loan

Yes, it’s absolutely possible to get preapproved for a car loan! In fact, it’s a smart move that can save you time, money, and headaches at the dealership. Here are some creative tips to snag that preapproval:

1. Play credit score detective: Before applying, channel your inner Sherlock Holmes and investigate your credit report. Look for any sneaky errors that might be dragging down your score. Fixing these could give your approval odds a serious boost!
2. Become a rate-shopping ninja: Don’t settle for the first offer you get. Instead, become a stealthy rate-shopping ninja! Apply to multiple lenders within a 14-day window to minimize the impact on your credit score. It’s like a financial kung-fu move that helps you find the best deal. Use our LoanFinder to improve your performance.
3. Leverage your relationships: Got a long-standing account with a bank or credit union? Use that relationship to your advantage! They might offer you more competitive rates or be more flexible with approval criteria.
4. Prepare a dazzling application package: Gather all your financial documents and create an application package that shines brighter than a newly waxed sports car. Include proof of income, employment history, and any other positive financial information that could sway a lender in your favor.
5. Consider a co-signer sidekick: If your credit is less than stellar, enlisting a co-signer with strong credit can be like adding a financial superhero to your team. Just remember, with great power comes great responsibility – for both of you!

By following these tips, you’ll be cruising down the road to preapproval in no time. Remember, getting preapproved puts you in the driver’s seat when it comes to negotiating at the dealership. So buckle up and get ready to score a great deal on your next set of wheels!

Why Should You Consider a Car Loan Refinancing

Here are the main reasons you should consider refinance your car loan.

1. Lower interest rates: If your credit score has improved or market rates have dropped, you may qualify for a lower interest rate, potentially saving hundreds or thousands of dollars over the life of your loan.
2. Reduced monthly payments: Refinancing can lead to lower monthly payments, freeing up cash for other expenses or savings.
3. Shorter loan term: You might be able to pay off your loan faster by refinancing to a shorter term, potentially saving on total interest paid.
4. Cash-out option: Some lenders offer cash-out refinancing, allowing you to borrow against your car’s equity for other financial needs.

When to Refinance Your Auto Loan

Timing can play a crucial role in the success of your auto loan refinancing. While there’s no hard and fast rule about when to refinance, certain scenarios can make it more advantageous.

Refinancing early in your loan term can potentially save you more money on interest over time. This is because auto loans are typically structured with front-loaded interest, meaning you pay more interest in the earlier years of the loan. However, refinancing too early (within the first 6-12 months) may not be ideal, as lenders often want to see a history of on-time payments before offering better terms.

On the other hand, refinancing later in your loan term might not yield significant savings, as you’ve already paid most of the interest. The sweet spot for refinancing is often between 2-3 years into your loan, assuming your financial situation has improved.

As for specific months, there’s no magical time of year that guarantees better refinancing terms. However, keep an eye on broader economic trends. For instance, when the Federal Reserve lowers interest rates, it can create a ripple effect that leads to more competitive auto loan rates.

Recent news suggests that auto loan rates may slowly decline through early 2025 if proposed Federal Reserve rate cuts come into effect. This could create a more favorable environment for refinancing in the coming months.

Ultimately, the best time to refinance your car loan depends on your individual circumstances. Consider refinancing when:

1. Your credit score has improved significantly;
2. Interest rates have dropped since you took out your original loan;
3. You need to lower your monthly payments;
4. You want to remove or add a co-signer;
5. You’re unhappy with your current lender’s service.

Refinancing car loan FAQs