If you’re stuck with a bad rate on your current auto loan, you could be paying significantly more than you need to. Refinancing your auto loan can help you get a better rate and pay less for your car over time. This is especially beneficial if your car is worth more than you owe, your credit score has improved, or interest rates have dropped since you got your loan. However, auto refinancing may not be the right option if your loan has prepayment penalties or you owe more than your car is worth.

In this guide, we will explain how auto refinancing works, when you should consider an auto refinance loan, and tips to ensure you’re ready for the application process.

How Does Refinancing a Car Loan Work?

Refinancing an auto loan replaces your existing loan with a new one, generally to save money overall by reducing your rate or to reduce your monthly payment by extending your loan term. You can apply for a refinance auto loan through a dealership, bank, credit union, or other lender. If you’re approved, your existing loan will be paid off and you’ll receive a new interest rate, loan agreement, and loan term.

Steps to Get Ready for Auto Loan Refinancing

Before you begin applying or searching for the best auto loan refinance providers, we recommend following these steps to ensure you’re ready for the application process.

  1. Review Your Current Auto Loan: Gather all of your loan information, including the lender’s name, loan term, annual percentage rate (APR), monthly payment, and payoff amount. This will save you time when you begin speaking with auto refinance lenders, who will ask for this information upfront. You can also plug some of this information into an auto loan calculator or comparison tool to see how much money you could save.
  2. Check Your Credit Score: Find out if your credit score has improved. A higher credit score means you may qualify for more competitive rates that could help you save money long term.
  3. Apply and Compare Offers: To get the best auto refinance rates, shop around and compare offers from lenders, and then pick the one that’s best for you. We recommend reaching out to at least five lenders so you can compare several offers.

Should You Refinance Your Car Loan?

Whether you should refinance your auto loan ultimately comes down to your unique situation. Consider all your options when deciding if refinancing is the best move for you right now. If you choose to refinance your car, be sure to get quotes from several lenders, check the disclosure statements, and compare them carefully before making a decision.

When Should You Refinance Your Car Loan?

Auto loan refinancing isn’t always a smart choice, but there are many occasions when it makes good financial sense. Below we will go into more detail about when it is best to refinance your car and when you should stay away from vehicle refinancing.

When You Should Refinance Your Car Loan

Here’s when it might be a good time to refinance your existing loan:

  1. Interest Rates Dropped: Interest rates rise and fall over time. If rates are much lower now than when you got your existing loan, it might be a good time to refinance your auto loan.
  2. Your Car Is Worth More Than You Owe: If you owe less than your car is worth, you might be able to secure lower interest rates.
  3. Your Credit Score Improved: A bad credit score may have forced you to take a high interest rate on your original loan. If your credit score has improved, you may be able to secure a new auto loan with a lower rate and save hundreds or thousands of dollars. Below is a breakdown of some steps to improve your credit score:
  • Pay Your Bills on Time: Payment history significantly impacts your credit score.
  • Reduce Debt: Lowering the amount of debt you owe can improve your credit score.
  • Check Your Credit Report: Look for any errors and dispute them if necessary.
  • Limit New Credit Inquiries: Too many hard inquiries can negatively impact your score.

When You Shouldn’t Refinance Your Car Loan

Here are a couple of situations in which it’s not in your best interest to refinance:

  1. Your Current Loan Has Prepayment Penalties: To make up for the interest they will lose, some lenders charge a fee if you pay off a car loan early. Even if you get a much better interest rate from a new lender, it may not be enough to make up for the fees you pay on your original loan.
  2. You Owe More on the Car Than It’s Worth: This is known as an “upside down” loan. While it may be tempting to try to lower your payments by refinancing your auto loan, you’ll have a hard time getting anything other than high interest rates in this situation — if you can get financing at all. It may be better to pay more toward your current loan each month to make up the difference before applying for a refinancing loan.

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