How to Refinance a Car Loan

A woman is sitting in the front seat of her car and is being handed the car keys.
Image Credit: Mauricio Jordan de souza coelho/Hemera/Getty Images

Refinancing a car loan doesn't require the amount of paperwork that a mortgage refinance entails, but it doesn't automatically save you money either. The process itself is relatively quick and can take just a few days from application to completion. However, you'll have a hard time refinancing a loan with a balance that's less than $5,000 or for a vehicle that's older or in poor condition.

Lenders and Rates

Many lenders won't refinance their own auto loans, so you'll have to check multiple banks and credit unions to find the best possible rate. You may get a lower rate if interest rates have gone down since you took out the original loan or if your credit score has improved since taking out the original loan. Your rate also is influenced by the age, mileage and condition of your vehicle and how much you need to borrow. If rates have risen or your credit score has dropped, you still may be able to lower your monthly payment by extending the repayment period -- though again, that depends on your particular vehicle and its condition. You can solicit multiple lenders for car loans within a 14-day period without each inquiry having an effect on your credit score.

Personal and Financial Data

As in any loan application, the lender will want confirmation that you'll be able to make the payments. Provide your name and address and your Social Security number to verify your identity. You'll also need to document your current job; if you've had that job for less than two years, you'll need to list your previous employers as well. You may need to provide copies of your pay stubs or W-2 forms to prove income. Finally, you'll need details on your current vehicle loan, both in terms of the amount owed and the name of the loan issuer.

Gather Vehicle Information

Lenders will want to know about your car: the vehicle identification number and the make, model and year. It's generally more difficult to find lenders willing to finance a car that's more than five years older than the current model year. You'll also need to give the lender the vehicle mileage. All this helps the lender determine the value of the vehicle in relation to the money you owe. Some lenders won't refinance models with high mileage or a loan balance higher than the car's value.

Closing Process

Once you find a lender and agree to terms, you'll have to sign the loan documents to complete the refinancing. Depending on the lender, you may be able to sign the documents by mail or online rather than in person. Regardless of how you complete the forms, refinancing can be completed in a matter of days. Once your original loan is paid off, you'll start making monthly payments to the refinancing institution.

Avoiding Extra Costs

Check both your current loan agreement and your proposed refinancing document to ensure you're not vulnerable to predatory lending practices or paying more than you need to. Some fees, such as a lien-holder fee or costs associated with transferring the title, are relatively common and shouldn't add much to the bottom line. However, some loans feature a repayment penalty that can force you to pay some or all of the remaining interest before refinancing. Other lenders may target borrowers with poor credit by offering loans that extend beyond the expected life of the car and incorporate high fees and interest rates. Read all documents carefully before committing to a new loan.