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How to refinance your car loan in 8 steps
Reduce your monthly payment and potentially qualify for a lower rate.
Refinancing your car loan could help you save in both the short and long term — and it will take less time than applying for a traditional car loan. Knowing what your priorities are before you begin the process can help ensure you find an offer that best meets your needs.
Before you start: Know why you want to refinance
There are two common reasons to refinance: to lower your interest rate or extend your loan term.
- Lower your interest rate. Refinancing for a lower interest rate can reduce your monthly payments and how much you pay in interest over the life of your loan. To save the most, choose a loan term that’s the same as your current term or shorter.
- Extend your loan term. Extending your loan term will reduce the amount you pay each month. This is a good option if you’re struggling to pay off your loan on its current term. However, this will increase the total cost of your loan since there’s more time for interest to add up.
Step 1: Review your current car loan.
Check your loan statement or log in to your account to find the following information:
- Monthly repayment
- Current interest rate
- Remaining balance
- Payoff amount
- Remaining loan term
- Prepayment penalty, if any
- Lender’s customer service number
While you’re reviewing your loan documents, weigh any fees you’ll be charged for paying off your loan early against potential savings from refinancing to make sure it’s worth it.
Step 2: Check the value of your car.
Your car’s current value will determine how much you need to borrow — and if refinancing is a viable option. To get an idea of how much your car may be worth, visit sites like Kelley Blue Book or Edmunds. Your vehicle’s make, model, mileage and condition, as well as where you live will all impact its overall value.
If your car is worth less than the amount you want to borrow, you could end up paying much more for your car than it’s worth. Instead, you might want to consider selling it privately or trading it in at a dealership for a less-expensive alternative.
Step 3: Check your credit and eligibility.
Factors like your credit score, debt-to-income (DTI) ratio, current loan amount and vehicle will all play a role in whether your refinancing application is approved.
Many refinancing providers also have a minimum loan amount they’re willing to refinance — usually around $10,000. If your current car loan is less than the lender’s minimum, your application won’t be approved.
In addition, lenders also have limits on the car itself: A vehicle over 10 years old or with more than 100,000 miles will be much more difficult to refinance than a newer vehicle with less mileage.
Every lender is different, so review its specific eligibility criteria before you apply to avoid a rejection — and an unnecessary hit to your credit score.
Step 4: Compare your refinancing options.
Research lenders that offer car loan refinancing to see what eligibility requirements you’ll need to meet and how much you may be able to borrow.
When comparing your options, consider the cost, term and how much your monthly repayment will change with your new loan.
Compare car loan refinancing offers
Step 5: Apply for preapproval.
Many car loan refinancing providers offer preapproval, which allows you to see what rates and terms you might qualify for before completing a full application — and taking a hit to your credit score.
Preapproval forms are generally available on the lender’s website, and you may know your potential terms within minutes of submitting it.
To complete the form, you’ll need a few basic documents, though some lenders may require more:
- Driver’s license
- Vehicle identification number (VIN)
- Proof of employment or income
- Proof of insurance
- Social Security number
Step 6: Review your preapproval offers.
After you’ve received a preapproval offer or two, calculate your new monthly payment to see if you’ll actually save money by refinancing. You should also consider outside factors like perks and discounts to make sure you’re getting the best deal available to you.
Most importantly, compare your new loan against the terms of your old one. If your previous car loan has a prepayment penalty or if the new car loan has a higher rate, it may not be worth refinancing.
Step 7: Complete the full application.
Once you’ve decided on a lender, reach out to submit a full application. If approved, review your new loan documents to make sure you understand the lender’s terms and conditions. Confirm your new payment due date, interest rate, loan term and potential fees. If you agree to the terms, sign your loan documents to finalize the agreement.
Step 8: Pay off your previous car loan.
Your new lender will either pay off your old car loan directly or transfer the funds to your account so you can pay it off yourself. Regardless, reach out to your old lender to confirm your payment has been processed and your account has been closed to avoid any headaches down the road.
Refinancing your car loan doesn’t have to be a painful process — especially if you take the time to prepare yourself. Understanding your priorities, comparing lenders and filling out preapproval forms can help ensure you find the best deal available to you. You can learn more about how it all works with our guide to car loan refinancing.
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