Last Updated: January 12, 2023
Recent statistics show car loans are at an all-time high, while rates are declining. Does that mean that the moment is right to revise your financing terms?
Let’s figure out how to refinance a car loan and whether this is a good idea for you in the first place.
What is Refinancing?
Refinancing is replacing an existing loan with a new one under different terms, ideally more favorable. This revision could involve lower interest rates, allowing for smaller monthly payments. You can get a better deal if you have an improved credit rating or the current market conditions allow it.
With auto refinancing, you can also extend the loan period. If you choose a higher term length, this can potentially lead to an increased interest rate. Alternatively, there is the option to reduce the loan period and interest rate by making a lump sum payment or upping the monthly installments. Also, switching from a variable rate to a fixed rate loan can offer protection if the APRs show a rising trend.
Refinancing your car loan sounds good, right?
Keep in mind, though, that you can’t eliminate the loan balance no matter what you change about the terms. The collateral will also stay the same. Additionally, there are always refinance fees that you will need to pay.
Should I Refinance My Car?
More often than not, the answer is yes. You should consider refinancing a car loan. But before you jump into it, here are a few things to keep in mind.
First, you should take a look at the car refinancing requirements. Every lender is different. Yet, most of them won’t consider you eligible if your vehicle is more than 7 to 10 years old or if the mileage is over 90,000 to 125,000 miles.
Once you have done that, the next step to figuring out if car refinancing makes sense is to consider if the benefits outweigh the fees.
Some lenders have prepayment penalties, meaning that there’s a charge for paying off your debt early. Your existing loan may also have a precomputed interest. In this case, you pay all of the interest in addition to the principal. Some loans are front-loaded, meaning that you have already returned most of the borrowed money in the beginning. So take a look at the time remaining on your car loan to see if refinancing is a good option for you.
To refinance a car loan, you also have to cover some refinancing fees such as state re-registration and lienholder. It’s a good idea to check if paying them makes sense in the long run.
If the first time around you got a subprime credit offer due to a poor credit rating, or adverse market conditions, then definitely look at your option on how to refinance a car loan. It can give you a favorable rate with lower monthly payments.
How To Refinance a Car Loan
You’ve heard the good and the bad of refinancing and figured out if it’s a good option for you. So, how does refinancing a car work? Read on.
Make sure refinancing your car loan is a good idea for you
If you’ve read the ‘Should I Refinance My Car?’ section, you are well on your way to figuring out if auto refinance is a good idea for you.
While refinancing means lower monthly payments by stretching out the loan time or paying less money in interest, it’s not always the most viable option. You can get a pretty good idea of how much you can save if you use an online auto refinance calculator.
Evaluate your credit
This is the best starting point. Your current interest rate is largely dependent on what credit score you had when applying for the loan.
The first time around, you might have gotten a bad deal due to your poor credit score. If your score has improved since then, this will have a positive impact on the refinancing terms.
On the flip side, if you had a good credit score that has dropped since getting your loan, you might not get the best auto refinance rates after all.
Get familiar with your current loan agreement
There are different types of loans. Get familiar with the one you have taken out for your car. Does the interest match the current market trend? Do you have a prepayment penalty? If your loan is front-loaded and you are more than halfway through, maybe refinancing a car isn’t your best option.
Prepare the documents needed for a loan application
Before heading down to any of the auto refinance companies, here is a checklist of documents divided into two categories — mandatory and frequently required.
Documents that are always required
- Proof of identity and residence
Usually, a driver’s license, passport, US visa, or other government-issued ID showing your photo and name should be enough for proof of identity and residence. This is a federal law requirement that all vehicle refinance companies must comply with.
- Proof of car insurance
Your current insurance must be compliant with state laws. In addition to that, the lender might have other requirements, such as a certain amount of coverage, before they can approve a loan. Be sure to check if your insurance checks all the boxes.
- Current vehicle registration
If you are in a state where you are responsible for holding the vehicle title, you will need to provide it along with the registration number. This will help speed things up with refinancing your auto loan.
Frequently required documents
- Credit and banking history
Your credit and banking history has an impact on your auto refinance rates. Some lenders utilize a different credit score system than the FICO auto score to determine your creditworthiness. They will look at your credit history, including the type of accounts you have and when you opened them, the credit limit or loan amount, your current balance, and past payment history.
Any late payments or unpaid bills, as well as your total debt obligations, will serve to determine if you have a low enough debt-to-income ratio (DTI) to support refinancing an auto loan.
- Proof of income
Before they approve the refinance, lenders will want to determine if you can repay your car loan. This includes considering your income’s size but goes beyond that. They will look at your assets and employment, monthly expenses, and credit history to determine that you can pay back the loan.
- Vehicle information
A common request is to provide information about the vehicle, such as purchase price, vehicle identification number (VIN), car manufacturing year and model.
Compare offers from lenders with a pre-approval process
Being armed with information is essential. Financial experts recommend getting loans pre-approved by multiple lenders. Yet, getting pre-approval by more than three lenders can be a waste of time and money as the car refinance rates and loan terms will vary minimally, if at all.
Apply and evaluate the new loan terms
So, how does refinancing a car work after you have been pre-approved? The final step of the refinancing process is evaluating the new loan terms. The obvious thing to keep in mind is the total payback amount. This includes the principal amount of the loan plus all the other costs, including interest, origination fees, credit reporting fee, application costs, etc.
The loan should be right for you because you don’t want to default when you refinance a car loan. So before deciding, evaluate the offered repayment speed and convenience.
Finally, look up the lender you are choosing. Reputation and trustworthiness are crucial.
Best Auto Refinance Companies
If you have decided that refinancing is the best option for you, and the time is right to do it, here are some of the best auto refinance companies to check out:
Auto Credit Express
This lending platform doesn’t have a minimum credit score requirement, making it a perfect match for people in a tight spot. The minimum lendable amount is $5,000 — much lower than the industry standard. The APR is between 3.99% and 29.99%. This is a pretty good range when dealing with all kinds of credit scores.
Another plus side is that Credit Express only performs a soft credit check to create your borrower profile and connect you with suitable direct lenders. Overall, this is one of the best car refinance companies for people with bad credit or those who don’t want their score damaged from a hard credit inquiry.
LightStream has some of the best offerings on the market. This lender is suitable for people with good or excellent credit history, with a minimum score requirement of 660.
LightStream’s lowest auto refinance rates start at 2,49%. It also offers 0,1% lower APRs than any competitor if you present evidence of loan approval on the same terms. With a fast funding process, you can receive the requested amount as early as the same business day.
The loan amounts range between $5,000 and $100,000. The only downside is that LightStream performs a hard credit pull from TransUnion or Equifax.
The minimum credit score requirement to qualify for auto refinancing with this lending platform is 510, making it an option for people with poor to decent credit scores. It also runs only a soft credit inquiry for presenting you with direct lenders’ offers. A hard check is required when your loan is approved, though.
LendingTree allows co-signers, so that’s another option for those with not-so-perfect credit history. The loan range meets the industry standard and is between $5,000 and $55,000. The downside of LendingTree is that it has vehicle limitations. Cars must be no older than 10 years and have mileage of less than 120,000 miles.
Car.Loan.com has a loan range from $7,500 to $45,000. Applying for financing only involves a soft credit check, which won’t put any dent in your credit score. It has some of the lowest APRs — from 0% to 25%. Naturally, if you have no credit history or have recently filed for bankruptcy, you will get the worst terms for auto refinance loans. Car.Loan.com doesn’t specify its minimum credit score requirement and typical funding time.
Final thoughts: Is Refinancing Worth it?
So far, we have figured out how to refinance a car loan in several easy steps.
But is it worth it? There is no one size fits all answer. It should be evaluated on a case-to-case basis. If you’re on the fence, consulting with a refinancing broker is a good idea.
Refinancing a car loan can cause a slight dip in your credit score, as most lenders run a hard inquiry at some point in the approval process. The impact is approximately five points, which isn’t significant. But if you apply with several financing providers, that number multiplies. Yet, regular and timely payments will bring your credit score back to its previous levels after several months.
Some companies run only a soft credit check on their potential clients to present them with an offer. So that’s also an option worth considering, especially if you want to compare companies’ terms.
To refinance car loans, you must submit:
- requested loan amount
- proof of identity, employment, and residence
- annual gross income
- vehicle title
- outstanding amount owed to the original car lender
Companies may impose different requirements (and restrictions) for your application based on your credit score, vehicle make/type/age, and loan amount.
The best places to refinance a car require a minimum credit score between 500 to 660. The exact number depends on the company and its policies.
The cost to refinance a car loan can vary depending on the provider, the origination/application fees, the state’s title transfer fees, and your vehicle type/make/age.
Some lenders may require you to put additional money down if your car’s current value is lower than the requested credit amount.
To refinance a car loan with bad credit you can resort to one of the lenders specializing in financing people with poor credit history. They typically have a lower or no minimal score requirement and accept applicants who had been turned down in the past.
But if you have a bad credit score and wonder how to refinance a car loan, bear in mind that the idea may not always be a good one. There are refinancing risks, such as prepayment penalties, origination fees, and extended loan life, which may offset the potential savings or even rack up costs.
The best advice is to check if you pre-qualify for better refinancing terms on your loan with providers who offer checks without impacting your credit score. Then, compare the rates and fees. You can also use a car refinance calculator to assess your situation and offerings.