How to Refinance Your Car Loan: Everything You Need to Know Before Refinancing

Dayton Uttinger  | 

If you’re struggling to make your monthly car payment, or if you are rethinking how much interest you’re willing to pay over the course of your loan, refinancing your car loan can be a great decision. However, while many people refinance their car loan in order to lower their car bill and get control of their budget, that is not reason enough to refinance your loan. It’s a complicated decision, even if it’s a fairly simple process.

How Auto Loan Refinancing Works

When you refinance your auto loan, you are essentially paying off your old loan with a new one, with different terms. You can get this new loan through the same lender, or a different one.

For example, if you don’t like the interest rate that your current lender has on your car loan, you can go to a new lender and refinance. The new lender would pay off your old loan, and give you a new loan with different terms.

When to Refinance Your Auto Loan

There are a few reasons why most people refinance their auto loans. Ultimately, the best way to refinance is going to depend on your reason for doing so.

  • You want to lower your interest rates, so you won’t pay as much long term.
  • You want lower monthly payments.
  • Your current loan is subprime.
  • Your credit score has significantly improved since you took out the loan, and you want to take advantage of the improvements. You might now qualify for a much better loan.

Check Your Credit

If you plan on refinancing your loan, you need to check your credit score. Your credit score is one of the most important factors that your lender will reference when approving you for a new loan.

It’s still possible to refinance a car with bad credit, but you stand a better chance with a good score. Make sure you understand your credit score, and be ready with explanations for any dives or negative items in your history. Also, be prepared for a new hard inquiry; if you are trying to rebuild your credit score or are still on the fence about refinancing, hold off until you are ready for the slight hit your score will take from the hard pull.

Documents You Need to Refinance Your Car

In order to refinance your car, you’ll need to have the following documents handy:

  • A payment stub from your current auto loan
  • Your driver’s license
  • Your VIN (Vehicle Identification Number)
  • Your Social Security Number
  • Pay stubs from your last paycheck or proof of employment

Additionally, you might want to read over your old loan contract. Some lenders have fees for paying off your loan too early, and refinancing counts as exactly that. However, just because there is a fee doesn’t mean that refinancing isn’t worth it. You could still save more money from a reduced rate or a shortened loan term than the penalty amount.

Compare Rates From Different Lenders

When you’re refinancing, it’s important to shop around to get the best rate possible. Some lenders might be more willing to work with you than others. Credit unions, banks, dealerships, and subprime loan companies all offer refinancing; you might have to shop around a bit before you find your best option.

You first need to make sure that you fit the qualifications for whatever lender you’re looking at. Some lenders will only refinance cars that are less than 150,000 miles, but others might care about how much your remaining balance is. Before you go through all the effort of applying for refinancing, make sure that you qualify under that lender.

After you have some leverage, contact your original lender. You’re already their customer, and if you threaten to leave for their competitors, they may be willing to refinance your loan at no additional cost. This could be your best refinancing option, since it requires minimal effort and still offers all the benefits of refinancing — if you are prepared to negotiate.

If you do go to a new lender, however, keep in mind who is likely to offer you better rates. You stand a better chance with credit unions and banks if you’ve been a reliable customer there, and subprime lending is traditionally for borrowers with bad credit or poor payment history. Lenders usually consider anything below 580 to be a poor credit score. If you fit in that category, they might be your only shot at refinancing.

Sign Your New Loan Agreement

If you’re able to find a competitive new loan, your lender will walk you through the process of refinancing. They’ll have you sign several papers and advise you how you’ll be paying your new loan. All in all, the process only takes a few hours, and it can leave you significantly better off financially.


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Dayton is a chronic Wikipedia addict, which is detrimental to her social life but stellar for her writing. She resides in Boise, ID, surrounded by her own frantic outlines, highlighted encyclopedias, and potatoes. The latter was not by choice.

This post was updated June 7, 2018. It was originally published June 9, 2018.