Refinancing Your Car Loan: How to Save on Loan Rates

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If you’re not happy with your current auto loan, refinancing it may be a smart financial move. 

But it’s essential first to understand how refinancing cars works and what to look for in your auto lender. Otherwise, you could end up making a bad situation worse.

When does it make sense to refinance your car?

If you are considering refinancing your auto, you probably have one of two goals in mind:

  • Lower your interest rate, or
  • Lower your monthly car payment

In some situations, you may be able to accomplish both. For example, suppose your credit score has improved since you took out the initial auto loan. In this case, you may be able to get a new loan with the same term but a lower interest rate. That would result in a slightly lower monthly payment as well.

Let’s look at how this works in action.

A five-year loan for $15,000 at eight percent interest produces a monthly payment of $304. If you got that loan a year ago and your credit score has gone up by several points, you might be able to get a four-year loan (since that’s how much time you have left on your existing loan) at a better interest rate to pay off your remaining balance. After a year, the balance on your initial $15,000 loan will have dropped to $12,237. If you managed to secure a four-year loan for that amount at five percent interest, your new monthly payment would be just $282, and you’d end up paying less interest over the life of the loan.

But not everyone will be so fortunate as to get both a lower rate and lower monthly payment, so you’ll need to decide which is more important to you.

Once you’ve picked a financial goal for your auto loan, it’s time to consider all the factors to see if now is the time to refinance.

You can probably get a better deal on a refinanced auto loan in the following situations:

  • Your credit score has improved.
  • Interest rates have dropped.
  • You got a lousy deal on your initial loan.
  • You’ve made all your loan payments on time.

On the other hand, it doesn’t make sense to refinance your auto loan if:

  • The remaining balance on your current loan is under $7,000.
  • Your vehicle is more than ten years old.

You may be especially motivated to refinance your auto if you owe more on the vehicle than it’s worth. This is called being underwater or upside down, and it’s a bad financial situation.

However, finding an auto lender who will extend alone in these circumstances is extremely tough. That’s because your vehicle is the “collateral” on your auto loan. If you stopped making payments on the loan, the lender wouldn’t be out of all the money they lent you, because they could confiscate your vehicle and sell it. However, if the loan amount is higher than the value of the car, the lender would lose money on the sale in this worst-case scenario. That makes underwater auto loans riskier for lenders, and they likely won’t agree to such a loan unless you have truly stellar credit.

How the refinancing process works

If you’ve decided to refinance, the first step is to check your loan contract and verify that there are no prepayment penalties. Auto loan refinancing means that your new lender will pay off the existing loan for you, and that’s considered a loan prepayment. If you have prepayment penalties on your contract, you could end up spending more on penalties than you’ll save by doing the refinance.

Once you’ve verified that your auto loan is prepayment-penalty-free, get your most recent loan statement and find your loan balance (how much you still owe). That’s how much you’ll need to get from your new lender to get clear of the old one.

Next, look up how many months you have left on the loan, AKA the loan term. You don’t necessarily have to get a refinanced car loan that’s the same as your current loan term, but it’s something you’ll want to keep in mind as you compare monthly payments. A longer term means smaller monthly payments, but it also means you’ll pay more in interest over the life of your loan.

Finally, note your current monthly payment and current interest rate so that you can compare them to the auto refinance loan offers you dig up.

If you haven’t checked your credit score recently, it’s a good idea to get one from a credit union before you start talking to lenders. If your score has gone up since you got the original loan, congratulations! You have a good shot at getting a better deal on your refinanced loan. If it’s gone down, pull up your credit report and see if there are negative comments from lenders or other sources. There may be a mistake on your credit history that’s dragging down your score. In that case, having the mistaken comment removed may instantly improve your credit score (and make getting a good deal on a refinanced car loan much easier).

At this point, you’re ready to get some quotes from auto refinance lenders and find the best deal. Get at least three quotes from auto lenders by doing some manual research on the web. Once you’ve had a chance to look at some actual numbers, you’ll know whether refinancing is a good way to hit your financial goals or not. Assuming you get at least one quote that meets your needs, you can then proceed with the refinancing process.

Before you commit to a particular lender, it’s a good idea to check online for reviews and customer feedback for that lender. You’ll want an auto refinancing company that will provide excellent customer service and will work with you to resolve any problems. It’s best to steer clear of companies with subpar reputations even if they offer you a slightly better deal.

Wish there was an easy way to compare quotes between insurance providers, too? 

Insurify is an ideal way to get started on your car insurance journey. Compare auto insurance quotes from different companies using identical factors and get an “apples to apples” set of quotes. Since you get all the quotes listed together at once, you can do a quick overview and see which company can offer the best rates to fit your needs. You can also play around with coverage limits to see how they affect the quotes you receive.

Start the auto loan refinancing process

When you’ve narrowed your search down to the best lender, you can start the actual refinancing process by filling out a loan application with the lender of your choice. You’ll need some specific bits of information to fill out the loan paperwork:

  • Your driver’s license number;
  • Your vehicle identification number (VIN);
  • Your Social Security number; and
  • Proof of employment and/or one or two recent pay stubs from your employer.

Some lenders will also ask for one or two references. Usually, one of these can be a family member, and the other has to be someone who lives at a different address.

Before you commit to the new loan, carefully check over the loan documents to confirm that you’re getting the deal you wanted. It’s also wise to check for other potential issues, such as prepayment penalties. Ideally, you want a refinanced auto loan that’s as clear of penalties as possible. This is also a good time to check with your lender to see if they offer a better interest rate for borrowers who sign up for automatic payments.

Once you’ve filled out all the necessary paperwork and returned it to the lender, your new auto loan company will pay off your existing loan and set up your new loan. Note your first payment date so that you can be sure to get off on the right foot with the lender by making your payment on time.

Now you can sit back and enjoy the feeling of having gotten your financial life in order. And with luck, your new loan will be such a good deal that you won’t ever have to refinance this vehicle again!

And don’t forget this other opportunity to save: taking five minutes to compare car insurance quotes and get $489 back in your wallet with Insurify.

Updated September 25, 2019

Wendy Connick is the founder and owner of Connick Financial Solutions, a provider of tax and bookkeeping services and a QuickBooks Online Certified ProAdvisor. A long-time freelance writer, she specializes in business and finance articles on subjects including taxes, investing, and retirement. Wendy is an Enrolled Agent (EA), the only federally licensed tax practitioners who specialize in taxation and have unlimited rights to represent taxpayers before the IRS. She is a member of the National Association of Enrolled Agents and a certified volunteer for VITA (Volunteer Income Tax Assistance), an IRS-sponsored program to provide free tax help for low-income individuals and families.