How Does Refinancing Work?

Refinancing a vehicle involves replacing your current auto loan (that you used to purchase your car) with an entirely new one. The new lender will repay your old auto loan and provide you with a new loan and payment plan.

For many borrowers, auto refinancing can provide great benefits such as a new monthly payment plan and interest rate.

When Should You Consider Refinancing Your Car Loan?

Many borrowers would like to pay off their car loans as quickly as possible and enjoy their fully-paid off cars while still having value in the vehicle. However, there are some instances where refinancing the loan rather than paying it off may make better financial sense.

So how exactly do you know that it’s the right time to refinance? Here are a few circumstances where it may be a good option:

1. You Would Like to Change Your Loan Terms

Loan terms are the expected guidelines and conditions you accepted before taking your original auto loan. They generally cover the repayment period for the loan, monthly payments, interest rates, associated costs, fees for late penalties or other expenses, and any special situations. Borrowers are advised to review loan terms thoroughly to ensure they understand their financial obligations before they borrow and to spot potential hidden fees or clauses that could cost them more money.

If you would like to change an aspect of your loan, refinancing may provide that opportunity. You may be able to acquire a lower interest rate, lower monthly payment, or a longer repayment period. However, while increasing your loan repayment period may lower your monthly payment, it could also increase the total amount of interest you pay over the life of the loan.

Alternatively, reducing your repayment period will likely increase your monthly payments, but could reduce the total amount of interest you pay on the car loan, especially if you can negotiate a lower rate. Either way, refinancing may provide borrowers with an opportunity to adjust their loan terms.

2. US Consumer Loan Rates May Fluctuate

The interest rate on your loan may depend on factors like your income, credit score, loan term, and loan amount. Did you also know that the Federal Reserve can lower consumer loan rates to reduce borrowing costs for businesses and consumers? This often happens during financial downturns like the COVID pandemic. The Federal Reserve has the authority to increase loan rates too, as we’ve seen in 2022.

3. You Have Improved Your Credit Score

Your credit score is a numerical rating of your creditworthiness. Simply put, it rates your likelihood of paying your debts in full and on time, typically using a scale between 300 and 850. Higher scores indicate that you may be a lower risk and are more likely to clear your debts on time and be approved for a loan, while lower scores indicate that you may have had some challenges with credit in the past, or have less time utilizing credit.

Your credit score will play a significant role in determining the interest rate for your car loan. If, for example, you have a credit score below 670, you are more likely to be charged a higher interest rate when you take out a car loan than if you had a score above 670.

You may be able to qualify for a better interest rate if your credit score has improved since you last purchased your car. Be aware that credit scores consider a lot of factors, and they can change each month for individuals.

4. You Have Positive Equity

Do you know the market value of your car? If you have made enough car loan payments so that the value of the car is more than the remaining amount of the auto loan, then you now have positive equity.

This means that the vehicle’s market value has now exceeded the principal amount on the loan. You may be able to get favorable terms if you refinance your car, since lenders are looking to secure their loans with an asset that has strong value in the market.

5. You Want a New Auto Lender

Other than financial reasons, you may also choose to refinance your car if you don’t like how your current lender conducts their business. This can include poor record-keeping or a desire for better customer service. If your current lender isn’t meeting your expectations, refinancing can allow you to shift to a new financial institution.

Benefits of Refinancing a Car Loan

Now that you know some of the situations and circumstances where refinancing your vehicle may be beneficial, consider some potential benefits to refinancing:

  • Lower monthly payment - If your monthly payments are taking a significant chunk of your income, refinancing may allow you to lower your payments to a more manageable level and ease the strain on your budget. Remember this may increase your repayment period and could result in more interest paid over the loan’s lifetime. Weigh your options to make the best choice for your current situation.
  • Lower interest rates - You may be able to get a lower interest rate on your auto loan through refinancing. This could happen for a number of reasons including if your credit score has improved or there has been a drop in market interest rates.
  • Reduced loan repayment period - Refinancing may allow you to reduce your repayment term if you would like to clear your auto loan as soon as possible. Although this may result in a higher monthly payment, there may will be an overall reduction in the total interest paid on the auto loan. This could also free up the payment amount for other things like debt reduction or a new purchase.

As you research your refinance options, consider whether these benefits outweigh any potential drawbacks. Think about whether your budget will be able to handle any changes in payment or the length of a new loan.

Does Refinancing Your Auto Loan Make Sense to You?

After housing, buying a car is often the second-largest purchase Americans make in their lives. Since refinancing an auto loan can have a significant effect on your finances, it requires a lot of planning and consideration.
Here are some other factors that helps determine the right time to refinance:

1. Does Your Car Have Negative Equity?

Negative equity refers to the outstanding loan amount on your vehicle being greater than its value. A common phrase you may have heard is that someone is “upside down” on their loan, meaning they have negative equity. For example, if you purchased a car for $23,000 and you’ve paid $5,000 towards your auto loan, you have a loan balance of $18,000. Should the vehicle be worth $15,000 in the market, then you have $3,000 of negative equity in that car. Some borrowers may have a harder time being approved for new loans or getting loans with favorable terms, since lenders want their loan security (the collateral) to be valued higher than the amount they lend. In the example above, you could be asked to cover the $3,000 difference before entering into a new loan.

2. How is Your Credit Score?

Has your credit score improved since you took out the auto loan? Lower scores are less likely to qualify for a lower interest rate, especially if market rates haven’t changed. It’s a good habit to check your credit reports on a regular basis (at least annually) to ensure you are on the right track and that there are no errors that can impact your score. Research whether you can get a free report from the three credit bureaus (Equifax, Experian and Trans Union).

3. How Old Is Your Car?

Note that some lenders may limit refinance options for cars with higher mileage or older model years. Newer vehicles with recent loans can also be limiting since the vehicle’s value could be lower than the current loan amount (taking us back to negative equity position).

4. Will You Have to Pay a Prepayment Penalty?

Depending on the terms of the first loan, you may also be subject to penalties if you refinance your vehicle and pay off the loan before the repayment period elapses.

5. Possible Additional Fees

You may have to pay fees to reregister and transfer your vehicle’s title after refinancing. Since these fees typically vary on a state-by-state basis, you should look at the auto refinancing fees charged in your state before you pull the plug on your current loan.

6. How Long Should You Wait to Refinance a Car?

Did you know that you could refinance your vehicle as soon as you purchase it? While it may be beneficial right away due to rate changes or your personal situation suddenly changing, it may make more sense to wait. Remember that vehicles start to depreciate as soon as they leave the lot.

How To Refinance a Car

If you have reviewed and considered all of the factors surrounding refinancing – including your credit score, market interest rates, and your vehicle’s age – you can jump into the actual process of refinancing your car.

1. Collect Necessary Documents

You will need the following documents before you can start the auto refinancing process:

  • Personal information: Including previous addresses, social security numbers, employment details and monthly rent or mortgage payments
  • Proof of income: This could include a tax return, employment history, or a paycheck stub
  • Copy of auto insurance on the current vehicle
  • Details of your current auto loan: This provides your lender details, repayment terms, monthly payment, and interest rate
  • Information about your vehicle: This includes the Make (such as Chevrolet or Ford), Model (like Malibu or Bronco), current mileage, Model Year, and the 17-digit Vehicle Identification Number (VIN).

2. Weigh Auto Loan Options and Prequalify, if Available

A prequalification is a soft inquiry that may or may not impact your credit score – you can ask the lender to confirm. While prequalification isn’t available with all lenders, it allows them to look at your information and tell you the offers you may be eligible for. However, note that even if you prequalify for a loan, you will still have to submit a full application.

Either way, prequalification is a great way to shop for offers without committing. Once you have looked at different lenders and seen what they have to offer, you can go to the next step.

3. Apply for a Car Refinance Loan

Once you have collected all the necessary documents and shopped around for the best terms, you can now apply for the auto refinancing loan. This typically involves submitting a loan application, and it requires data from the personal documents you have gathered.

Once approved, the lender will provide you with a document outlining the terms of the new loan. Review any document you receive thoroughly to ensure there aren’t any additional fees or clauses you want explained. Once you sign the loan document, make sure you store a hard copy of all paperwork.

4. Clear Your Original Auto Loan and Start Paying the New One

Although your new lender typically handles the loan payoff, you should contact your previous lender to make sure your original auto loan has been cleared and that the lien has been transferred. Now, you can start making payments on the new auto loan while continuing to enjoy your existing vehicle.
Refinance Your Car Today with PNC Bank


Are you looking to refinance your auto loan? Consider PNC Bank. We provide a wide variety of finance options for new or used vehicles, including refinancing. Visit our website to learn more about how to refinance your car with us.