Auto loan balances can be a major contributor to household debt. In recent years, U.S. auto loan balances have reached into the trillions of dollars, according to the Federal Reserve Bank of New York.[1] If a car payment no longer fits your budget, refinancing may be one option to review.
- Refinancing may be worth considering if loan rates have decreased, your credit has improved, or your current loan terms no longer fit your financial situation.
- The benefits of refinancing may include lower monthly payments, more favorable interest rates, and/or a reduced loan repayment period. Still, borrowers should consider potential drawbacks and their budget's ability to handle changes.
- Factors to consider before refinancing include whether you owe more on the car than it's worth, vehicle age and mileage, fees, prepayment penalties, and how a new loan may affect total borrowing costs.
- Refinancing involves collecting necessary documents, weighing auto loan options, applying for a car refinance loan, and clearing the original auto loan before starting payments on the new one.
If you are considering refinancing your car loan, it may help to understand how the process works, why borrowers refinance, and what to review before applying.
How Does Refinancing Work?
Refinancing a vehicle is the replacement of your current auto loan with an entirely new one. The lender will repay your old auto loan and provide you with a new loan and payment plan.
For many borrowers, auto refinancing can offer meaningful advantages, including a restructured monthly payment or a better interest rate.
How To Refinance a Car
If you have reviewed and considered all the factors surrounding refinancing – including your credit score, market interest rates, and your vehicle’s age – you are ready to step into the actual process of refinancing your car.
1. Collect Necessary Documents
You will need the following documents before you start the auto refinancing process:
- Personal information: Including how long you've lived in your current address, previous addresses and length of stay at each, your Social Security number, employment details, and monthly rent or mortgage payments.
- Proof of income: This could include a tax return, employment history, or a paycheck stub.
- Proof of insurance: Provide a copy of your auto insurance for the current vehicle.
- Your current auto loan agreement: 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), Mileage, Model Year, and the 17-digit Vehicle Identification Number (VIN).
2. Weigh Auto Loan Options and Prequalify, if Available
Prequalification may allow a lender to review basic information and estimate loan offers before a full application. It often uses a soft inquiry, which does not affect FICO Scores, but it is still a good idea to ask the lender how credit will be checked.
Even if you prequalify, you usually still have to submit a full application. That application may require a hard inquiry and a closer review of income, credit, vehicle details, and current loan information.
3. Apply for a Car Refinance Loan
Once you have collected all the necessary documents and shopped around for the best terms, it’s time to apply for the auto refinancing loan. This typically involves submitting a loan application and supplying information from the personal documents you have gathered.
If 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 that require explanation. Once you sign the loan document, make sure you store a hard copy of all paperwork for reference.
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 may start making payments on the new auto loan while continuing to enjoy your existing vehicle.
When Should You Consider Refinancing Your Car Loan?
There are some instances where refinancing the current loan rather than paying it off makes better financial sense. How exactly do you know that it’s the right time to refinance? Here are a few circumstances where refinancing may prove a good option:
1. You Would Like to Change Your Loan Terms
If your current loan no longer fits your needs, refinancing may allow you to adjust it. For example, you may be able to secure a lower interest rate, reduce your monthly payment, or change the length of your loan.
Keep in mind that extending your repayment term may lower your monthly payment but increase the total interest paid over time. Shortening your loan term may raise your monthly payment but reduce the total interest paid.
2. US Consumer Loan Rates May Fluctuate
Auto loan rates can shift over time due to market conditions and lender factors. If rates are lower than when you originally took out your loan, refinancing may help you qualify for a better rate. A lower rate is not guaranteed, and the offer you receive will depend on the lender’s review of your application.
3. Your Credit Score Has Improved
If your credit score has improved significantly since purchasing your car, you may be able to qualify for a better interest rate. However, be aware that credit inquiries, especially a large number of inquiries in a short period of time, may negatively affect your credit score.
4. You Have Positive Equity
Do you know the market value of your car? If you have made enough loan payments so that the value of the car is higher 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. If so, you may be able to get favorable terms if you refinance, since lenders are looking to secure their loans with an asset holding strong market value.
5. You Want a New Auto Lender
Other than financial considerations, you may also choose to refinance your car if you are dissatisfied with your current lender. If your current lender isn’t meeting your expectations, refinancing may 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 prove beneficial, consider some potential benefits to refinancing:
- Lower monthly payment: If your monthly payments are taking a significant portion of your income, refinancing may allow you to lower payments to a more manageable level, easing the strain on your budget. Actual savings will depend on the loan amount, term, rate, and fees. Remember, this may increase your repayment period and could result in more interest paid over the loan’s lifetime.
- Lower interest rates: You may be able to get an improved rate on your auto loan through refinancing. This could happen if your credit score has improved or there has been a drop in market interest rates.
- Shortened loan repayment period: Refinancing may allow you to shorten your repayment term if you would like to pay off your auto loan as soon as possible. Although this may result in a higher monthly payment, there may be an overall reduction in the total interest paid over the life of the loan. Once your loan is paid off, you could then direct that money to other needs, such as overall debt reduction, boosting savings, 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.
FAQs: Does Refinancing Your Auto Loan Make Sense for You?
Does Your Car Have Negative Equity?
Negative equity means the loan balance is higher than the car’s value. This may make refinancing harder. Learn more in our guide to an upside-down car loan.
How Is Your Credit Score?
A higher credit score may help borrowers qualify for better loan terms. Many FICO Scores range from 300 to 850, with higher scores generally showing stronger credit health.[2]
How Old Is Your Car?
A car’s age, mileage, and value may affect refinance eligibility. Some lenders limit refinancing for older vehicles or cars with high mileage.
Will You Have to Pay a Prepayment Penalty?
Refinancing pays off the original loan. Review the current loan agreement to see if a prepayment penalty may apply.[3]
What Fees Could Apply?
Refinancing may involve title, registration, or lien transfer fees. Compare those costs with the potential savings.
How Long Should You Wait to Refinance a Car?
Some borrowers may refinance soon after purchase. Waiting may help if the title still needs to transfer, credit has improved, or rates have changed.
Will Refinancing Affect Your Credit Score?
Applying may result in a hard inquiry. Multiple auto loan inquiries within a short shopping window may count as one inquiry, depending on the scoring model.[4]
Refinancing Next Steps
Ready to explore your options? Estimate your rate and payment with PNC's Auto Loan calculator.
