The average loan term for a new car is now about 70 months, and a term of 84 months is by no means rare. Given that fact, and the volatile nature of interest rates, it should come as no surprise that refinancing a car loan is an option.
The reasons are similar to those for refinancing a home mortgage. You might be able to get a lower interest rate, thus lowering your monthly payment and saving money over the life of the loan. You may even be able to access some of the equity you have in the vehicle.
It's all in the timing. If you've owned your vehicle for a while, and interest rates have fallen substantially since you purchased it, you might consider a car loan refi.
Key Takeaways
- Refinancing your car loan could save you money, especially if your credit score has increased since you took out the original loan.
- The application process might mean your credit score decreases by a few points, but this should be temporary.
- After you secure your new loan, it’s important to keep paying your old loan until the refinancing process is complete.
- You should also ensure that you make your new loan payments on time, and check your credit score after refinancing.
How to Refinance Your Car Loan in Six Steps
Before refinancing your car, consider whether it makes financial sense. If your credit score has decreased since you took out your loan, you might find that the best deal you can get is the one you already have.
Refinancing is relatively straightforward, but it does involve a bit of paperwork. There also are some important steps to take afterward. The most important is to make sure you don’t miss any payments on either your old or new car loan, and check how the new loan has affected your credit score.
If you are interested in refinancing, here’s how to go about it:
Review Your Current Loan
First, log into your online account with your existing auto lender. Collect some details about your current loan, including how much you still have left to pay, the interest rate, the remaining number of payments, and your monthly payment amount.
Assess Your Car’s Value
Check how much your car is worth using a website such as Kelley Blue Book or J.D. Power. This will give you an idea of how much you’ll be able to borrow with your refinance loan.
Understand Your Credit Score
Next, use a free credit monitoring service from a provider like Credit Sesame, Experian, or Credit Karma to check your credit score and review your credit report information.
The higher your credit score, the better the refinancing deal you can get. If your credit score is below 700, you might have some work to do before you can qualify for the best rate available.
Get Quotes
Many auto lenders allow you to apply for auto loan refinancing online, and some even offer pre-qualification for this type of loan.
Take the time to collect a few quotes to make sure you get the best rate.
Determine Your Savings
Once you have your quotes, you can compare them to your existing loan and see if refinancing makes financial sense. That is, are you saving a useful amount of money each month? Is it adding up to real savings over the life of the loan?
Apply for Refinancing
If you want to proceed with refinancing, apply directly to your chosen lender. With some lenders, you can do this online; with others, you’ll have to call them. You should be ready to supply information about your finances and your vehicle.
The decision will generally take a few days.
Refinancing can ding your credit rating at least in the short term. When you apply for a car loan, the lender will perform a credit check. Several credit checks with hard inquiries in a short period of time can temporarily lower your credit score because it looks like you're acquiring more debt.
Getting pre-qualified won’t affect your credit score, and if you make all of your inquiries within a 14-day period, they will count as one check for credit scoring purposes.
What to Do After Refinancing Your Car Loan
Once you have secured your new loan, there are a few important steps to complete to make sure that the refinancing process goes smoothly.
Keep Paying Your Existing Loan
First, it’s important to keep making payments on your old car loan. If you miss a payment, it could damage your credit score.
If you overpay on your old loan, you can call the lender and ask them to credit this amount back to you. It’s better to overpay than to run the risk of missing a payment and taking a hit to your credit score that can last up to seven years.
Receive Your New Loan
Once your new lender has processed your new loan, they will send you details of your payments and terms. They may also contact your old lender to inform them that you’ve refinanced your car.
Pay Off Your Old Loan
Next, you’ll need to pay off your old loan. Sometimes your new lender will contact your old lender on your behalf and pay off your old loan for you. Other lenders will send you a check to give to your old lender. If so, it’s important to send this check to your original lender as soon as you get it to avoid late charges.
Start Making Payments
Typically, the first payment on your new loan will be due 30 days after you formally accept the loan. Make sure you know when this payment is due, and that you make it on time to avoid fees or charges.
Some lenders offer an autopay service, which can help you to avoid missing a payment. You may even get a discount on the loan for enabling autopay.
Check Your Credit Score
Once everything else is done, check your credit score again. You can use a free credit monitoring service from a provider like Credit Sesame or Experian to do this.
It’s likely that you’ll see a slight drop in your score, due to the credit checks that were run when you applied for the loan. This is normal and should be temporary.
In any case, if you’ve refinanced at the right time, your car payment should be lower than it was before, so your refinance will save you money in the long term.
What Happens to a Loan After Refinancing?
When you refinance a loan, the original lender is paid off by the new lender. You’ll have to keep making repayments on the new loan, but your terms might be much better than before, which can save you money in long-term interest or lower your monthly payment amount, or both.
Do You Get Money Back After Refinancing a Car Loan?
Some lenders offer the option of giving you a lump sum in cash over the amount of your loan balance.
This is tempting but risky. You're giving up the equity you've built up in the vehicle. You're extending the amount of time you're paying it off. You might even wind up with negative equity in the vehicle, which is a precarious position to be in financially.
Can I Refinance My Car Loan with the Same Lender?
Many lenders will allow you to refinance your existing car loan.
If your credit score has improved substantially since you took out the original loan, your bank will be just as willing as its competitors to give you a better deal.
Can I Refinance My Car Loan If I Have Bad Credit?
It’s possible to refinance your car loan if you have a poor credit rating but you're unlikely to get a very good interest rate. Consider working with a credit repair company to get your finances in order before you apply for any more credit.
How Soon Can I Refinance My Car?
After purchasing your car, you have to wait at least 60 to 90 days to refinance your vehicle because that is the minimum amount of time it takes to transfer the car title into your name.
After this period passes, you may refinance.
The Bottom Line
Refinancing your car loan could save you money, especially if you can get a substantially lower interest rate. The application process might cause your credit score to decrease by a few points, but this should be temporary.
After you secure your new loan, it’s important to keep paying your old loan until the refinancing process is complete. You should also ensure that you make your new loan payments on time, and check your credit score after refinancing.
