Refinancing Your Auto Loan to Save Money
If your monthly car payment is taking up too much of your budget, you are not alone. With average new car payments routinely topping $700, finding ways to cut costs makes a massive difference. Refinancing your auto loan can lower your monthly bill, reduce your interest rate, or both. Here are the exact steps to secure a better deal on your car loan.
Why Refinancing Makes Sense
When you buy a car at a dealership, the finance office often acts as a middleman. They find a bank willing to lend you money, but they frequently add a percentage point or two to the interest rate as their own profit. This is called a dealer markup. By refinancing directly with a bank or credit union later on, you can often strip away that extra markup.
Additionally, your financial situation may have improved since you drove off the lot. If you bought your car when your credit score was 620, you might have received an interest rate of 10% or 11%. If you have spent the last year paying your bills on time and your FICO score is now 750, you could qualify for top-tier rates from lenders. Dropping your rate from 11% to 6% on a $25,000 loan saves you thousands of dollars over the life of the loan.
The Exact Steps to Refinance Your Auto Loan
Refinancing a car is much faster and simpler than refinancing a house. You can usually complete the entire process online in a single afternoon.
1. Find Your 10-Day Payoff Amount
Before you apply for a new loan, you need to know exactly how much you currently owe. Log into your current auto loan account and look for a figure called the “10-day payoff amount.” This number includes your remaining principal balance plus 10 days of calculated interest. New lenders use this exact figure to ensure they send enough money to close out your old loan completely.
2. Check Your Credit Score
You need to know where your credit stands before you shop. Pull your credit score for free through your bank or a service like Experian. To get the best rates on an auto refinance right now, you generally need a credit score of 740 or higher. If your score has dropped since you bought the car, it is usually best to wait and rebuild your credit before attempting to refinance.
3. Gather Your Vehicle Information
Lenders need specific details about your car to determine its value. Gather the following items:
- Your Vehicle Identification Number (VIN)
- The exact mileage on your odometer
- Your vehicle trim level (such as Honda Accord EX-L or Toyota RAV4 XLE)
- Proof of income (your two most recent pay stubs)
- Your current driver license and proof of auto insurance
4. Shop Around for Pre-Approvals
Never accept the first offer you see. Apply for pre-qualification with at least three different lenders. Pre-qualification uses a “soft” credit pull, which does not hurt your credit score.
Look into major banks, local credit unions, and online aggregators. Lenders like Capital One Auto Finance and Autopay are known for easy online pre-approval processes. Credit unions like PenFed and Navy Federal Credit Union often offer some of the lowest interest rates on the market, sometimes dropping below 6% for borrowers with excellent credit.
5. Review the Loan Terms Carefully
When you receive your offers, look at more than just the monthly payment. Pay attention to the Annual Percentage Rate (APR) and the loan term.
Some lenders will try to lower your monthly payment by extending the length of your loan. For example, if you have 48 months left on your current loan, a new lender might offer to stretch your new loan out to 72 months. Your monthly payment will drop, but you will pay significantly more in interest over those extra two years. The smartest financial move is to refinance into a shorter term with a lower interest rate.
6. Apply and Close the Loan
Once you pick the best offer, submit your formal application. The lender will perform a hard credit check at this stage. After approval, the new lender will typically send a check directly to your old lender to pay off the original debt. Within a few weeks, your old account will show a zero balance, and you will begin making payments to your new lender.
Hidden Costs to Watch Out For
Refinancing is highly beneficial, but you should be aware of a few minor costs.
First, check your original loan contract for a prepayment penalty. Some lenders charge a fee if you pay off your loan early, though this practice is becoming rare.
Second, your new lender has to register their name on your vehicle title. Your state Department of Motor Vehicles (DMV) charges a title transfer fee for this service. These fees usually range from $15 to $50, depending on where you live. Your new lender will typically roll this small fee into your new loan balance.
Frequently Asked Questions
Does refinancing hurt my credit score? When you formally apply for the new loan, the lender performs a hard credit inquiry. This might drop your score by a few points temporarily. However, making consistent, on-time payments on your new loan will quickly repair that minor drop.
Can I refinance if my car is worth less than I owe? Being “underwater” on your loan (owing more than the car is worth) makes refinancing difficult. Most lenders will only finance up to 100% or 110% of the current market value of the car. If you owe $20,000 but the car is only worth $15,000, you will likely need to pay the $5,000 difference out of pocket before a new lender will approve the refinance.
How soon after buying a car can I refinance? Legally, you can refinance immediately after buying a car. However, it takes a few weeks for the dealership to process your paperwork and transfer the title to your first lender. It is best to wait at least 60 to 90 days so your original loan is fully established in the system before you try to replace it.