The average monthly payment reached $742 for new cars and $525 for used cars by late 2024. These steep car payments put pressure on many budgets. The good news is that refinancing your car loan could provide a way out.
Let’s look at the numbers. A $30,000 auto loan refinanced from 9% to 7% interest after one year saves you $3,626 total. Your monthly payments drop by more than $23. Many car owners turn to this financial strategy to cut their monthly payments and reduce the total interest they’ll pay over the loan term.
New-car prices began falling in 2023. This left some owners with vehicles worth less than their loan balance. But refinancing an auto loan can still make sense, especially if your credit score has improved since your original purchase. Better credit scores typically lead to lower interest rates.
This piece covers everything about car loan refinancing. You’ll learn about current loan terms and how to finalize your new agreement. This knowledge will help you decide if refinancing fits your financial needs.
Understand Your Current Loan
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Getting information about your existing loan should be your first step before applying for an auto refinance car loan. The details will help you decide if refinancing makes sense financially and give you a baseline to compare new offers.
Check your remaining balance and interest rate
You need to know what you owe and your current interest rate to refinance your car loan successfully. Your current interest rate appears in your original loan documents, your lender’s website or app, monthly billing statement, or you can ask your lender directly. The Truth in Lending Act requires lenders to tell you specific loan details, including your interest rate.
Your interest rate plays a vital role in determining your total loan payments. People with higher credit scores tend to get lower interest rates at the time they refinance an auto loan.
Know your monthly payment and loan term
Principal and interest are the two main parts of your monthly car payment. The principal represents the amount you borrowed to buy the vehicle. To cite an instance, a $35,000 car purchase with a $5,000 down payment would mean a $30,000 loan principal.
The time you get to repay the loan is your loan term, which usually runs between 36 and 84 months. Your monthly payments decrease with longer terms, but you end up paying more interest over time. The best practice suggests spending no more than 10% to 15% of your gross monthly income on transportation costs, which covers loan payments, insurance, fuel, and maintenance.
Find out if your loan has prepayment penalties
Lenders often use prepayment penalties to discourage early loan payoffs. Since refinancing means paying off your original loan completely, you should check if your current loan has these penalties.
Auto loans in 36 states and the District of Columbia still have prepayment penalties, though they’re becoming less common. Here’s how to check if your loan has a prepayment penalty:
- Review your loan agreement carefully
- Look for terms like “prepayment penalties,” “pre-computed loan,” or “full amount of interest”
- Contact your lender if you’re unsure
The savings from refinancing might not be worth it if your loan’s prepayment penalty is too high.
Check Your Credit and Car Value
Your credit score helps determine if refinancing your car loan will save you money. You need to know your credit standing and your vehicle’s current market value before applying for a car loan refinance.
How your credit score affects refinance car loan rates
Interest rates from lenders depend heavily on your credit score. New car buyers with excellent credit scores can get average interest rates around 5.18%, while those with poor credit might see rates as high as 15.81%. The average rate for new car loans sits at 6.73%, and used car loans average 11.87%.
Lenders run a hard credit check when you apply for auto loan refinancing. This check will lower your score temporarily, but the effect usually lasts only about a year. You can minimize the impact on your credit score. Just submit all loan applications within a 14-day window. The FICO scoring model will treat them as one inquiry.
Several online services let you check your credit report and score free. Better refinance car loan rates might be available if your credit has improved since your original loan.
Use tools to estimate your car’s current value
These trusted resources help determine your vehicle’s current market value:
- Edmunds True Market Value (TMV)
- National Automobile Dealers Association (NADA) Guides
- Kelley Blue Book
These tools calculate estimates based on your car’s year, make, model, trim, mileage, and features. They also show different values: trade-in (lowest), private-party (higher), and dealer retail.
What to do if you have negative equity
Negative equity makes refinancing complicated. You have negative equity when you owe more on your loan than your car is worth. To name just one example, see owing $30,000 on a vehicle worth only $20,000 – that’s $10,000 in negative equity.
If you’re underwater on your loan:
- Wait to refinance until you build positive equity
- Make extra principal-only payments to pay down the loan faster
- Sell the car yourself instead of trading in, since private sales bring higher values
Note that refinancing with negative equity is possible but tough. Lenders see negative equity as a risk factor, which often leads to higher interest rates or less favorable terms.
Compare Lenders and Offers
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Shopping for multiple refinance offers helps you find the best deal. Borrowers save an average of $158 monthly—equivalent to $1,896 annually—through refinancing.
Look for pre-qualification with soft credit checks
You should start by finding lenders who offer pre-qualification through soft credit checks. These checks won’t affect your credit score. Pre-qualification shows you estimated loan amounts and interest rates before you submit a formal application. More importantly, you’ll see potential rates without any commitment.
The best way to protect your credit score while maximizing your options is to submit all applications within a 14-day window. Most scoring models will count these as a single inquiry.
Compare interest rates, loan terms, and fees
We focused on these important factors during the search:
- Interest rates and APR variations
- Available loan terms (typically 36-75 months)
- Application or document fees (many reputable lenders charge none)
- Prepayment penalties
You should calculate total costs over the loan’s life, not just monthly payments. A slightly lower interest rate can save you substantial money over time.
Watch out for hidden costs and upsells
The fine print usually reveals:
- Early termination fees, usually around 2% of your outstanding loan balance
- Transaction or processing fees (reputable lenders typically avoid these)
- Title transfer and registration fees
- Optional add-ons like extended warranties or insurance products
Auto refinancing can be more affordable than other financial transactions since many lenders don’t charge closing costs.
Apply and Finalize the Refinance
The final step involves completing your application and finalizing the auto refinance car loan after selecting a lender with favorable terms. This significant phase needs careful attention to detail and proper documentation.
Documents you’ll need to refinance an auto loan
Your application process becomes smoother with proper paperwork preparation. Lenders usually need these documents:
- Proof of income (pay stubs, W-2s, tax returns, or bank statements)
- Identification (driver’s license)
- Proof of residence (utility bill, lease agreement, or mortgage statement)
- Proof of insurance
- Vehicle details (year, make, model, VIN, and current mileage)
- Current loan information (lender name, account number, and payoff amount)
How the refinance process works step-by-step
Your refinance journey follows this sequence:
- Submit your application with all required documentation
- Receive approval from the new lender
- Review and sign loan documents
- The new lender either pays off your old loan directly or provides funds for you to do so
- Transfer your vehicle’s title, adding the new lender as lienholder
Many lenders provide online applications with quick decisions within minutes. Some lenders’ systems combine smoothly with state DMV databases to pull vehicle details automatically.
When to expect your first new payment
Your first refinanced loan payment becomes due about 30 days after loan finalization. You should keep paying your original loan until you get confirmation of its complete payoff.
The gap between loans might seem like you’re “skipping” a payment. However, interest keeps adding up from your new loan’s disbursement date. Some lenders give you grace periods of up to 45-60 days before your first payment is due.
Conclusion
Car loan refinancing is a smart money move that can cut your monthly payments and interest costs. A simple 2% drop in interest rate on a $30,000 loan could save you over $3,600 during the loan term. You need to understand your current loan details to make a good refinancing decision.
Start by getting complete information about your loan terms, credit score, and what your vehicle is worth. You should also check if your loan has prepayment penalties to avoid surprise costs that could eat into your savings. Better credit scores since your first loan could help you get much lower interest rates. This makes refinancing a great option.
Take time to compare different lenders because it helps find the best deal possible. Many people save nearly $1,900 each year just by shopping around. Watch out for hidden fees and extra services to make sure refinancing actually helps your finances.
Once you pick the best offer, the application moves fast if you have the right paperwork ready. Pay attention to payment timing during the loan switch to avoid missing payments or late fees. A few hours spent on research and applying could save you thousands over your loan term.
You don’t need complex financial knowledge to benefit from car loan refinancing. Online tools and simple application processes have made this option available to most car owners. Market conditions and personal finances may vary, but learning about refinancing options is a smart way to get better loan terms and improve your financial health.
FAQs
Q1. What are the key steps to refinance a car loan? To refinance a car loan, start by understanding your current loan terms and checking your credit score. Then, research and compare offers from multiple lenders, focusing on interest rates and loan terms. Once you’ve selected the best offer, gather necessary documents and submit your application. After approval, review and sign the new loan agreement.
Q2. How much can I potentially save by refinancing my car loan? Refinancing your car loan can lead to significant savings. For example, reducing your interest rate by just 2% on a $30,000 loan could save you over $3,600 over the life of the loan. Many borrowers save an average of $158 monthly, which amounts to nearly $1,900 annually.
Q3. Will refinancing my car loan affect my credit score? Refinancing typically involves a hard credit check, which can temporarily lower your credit score. However, this impact usually only lasts about a year. To minimize the effect, submit all loan applications within a 14-day window, as most credit scoring models will count these as a single inquiry.
Q4. What documents do I need to refinance my car loan? You’ll typically need to provide proof of income (such as pay stubs or tax returns), identification, proof of residence, proof of insurance, vehicle details (including VIN and mileage), and information about your current loan. Having these documents ready can streamline the application process.
Q5. Can I refinance my car loan if I have negative equity? Refinancing with negative equity is possible but challenging. Most lenders view negative equity as a risk factor, which could result in higher interest rates or unfavorable terms. If you’re in this situation, consider waiting to refinance until you build positive equity or make additional principal-only payments to pay down the loan faster.