How To Refinance A Car: 6 Steps To Save $150/Month
Discover step-by-step guidance on refinancing your auto loan to lower payments and save thousands in interest over time.
How to Refinance a Car
Refinancing a car loan involves replacing your existing auto loan with a new one from another lender, often to secure a lower interest rate, reduce monthly payments, or shorten the loan term. This process can save borrowers an average of $150 per month or $4,800 over the loan’s lifetime, depending on credit improvements and market rates.
Should You Refinance Your Car Loan?
Deciding to refinance depends on several factors including your credit score, current interest rate, remaining loan balance, and vehicle value. It’s ideal if your credit has improved since the original loan, interest rates have dropped, or you’re struggling with high payments. For instance, if rates have risen since purchase but your credit score increased, refinancing could still lower your rate.
Calculate potential savings using an auto loan calculator: compare current monthly payments against new terms. Aim for at least a 0.5-1% rate reduction to justify fees. Avoid refinancing if it extends the term excessively, as you’ll pay more interest overall.
Pros and Cons of Refinancing Your Car Loan
| Pros | Cons |
|---|---|
| Lower interest rates: Save on total interest, especially with improved credit. | Fees: Origination or prepayment penalties could offset savings. |
| Reduced monthly payments: Easier budgeting, potentially $150/month less. | Extended term: More interest over time if not shortened. |
| Shorter payoff time: Possible with extra payments post-refi. | Qualification hurdles: Vehicle age/mileage limits from lenders. |
| Better terms: Switch to biweekly payments for faster payoff. | Credit impact: Hard inquiry may temporarily lower score. |
Are You Eligible to Refinance?
Most lenders require a minimum loan balance of $7,500-$10,000, good credit (typically 660+ FICO), and on-time payments for the last 6-12 months. Vehicle criteria include model year no older than 10 years and mileage under 125,000. You must own the title outright (no liens from other parties) and have sufficient income to afford payments.
- Credit score: Higher scores (above 700) yield best rates.
- Loan age: At least 4 months into current loan.
- Equity: Positive equity preferred; upside-down loans harder.
Check your payoff amount vs. vehicle value using Kelley Blue Book or Edmunds: Value – Payoff = Equity. Negative equity may require rolling over, increasing costs.
How to Refinance Your Car Loan in 6 Steps
- Check your credit: Pull free reports from AnnualCreditReport.com. Dispute errors to boost score.
- Calculate current payoff: Contact lender for exact amount including fees.
- Shop rates: Get preapprovals from 3-5 lenders (banks, credit unions, online). Compare APR, terms, fees.
- Verify vehicle eligibility: Ensure age/mileage qualify.
- Apply and close: Submit docs (ID, income proof, title). New lender pays off old loan.
- Make payments: Set up autopay; consider biweekly or rounding up to pay early.
Preapproval strengthens negotiation, avoiding dealership markups. Process takes 1-4 weeks; continue old payments until confirmed paid.
Where to Refinance Your Car Loan
Credit unions: Often lowest rates for members (e.g., PenFed, Navy Federal).
Online lenders: Fast approval, competitive APRs (e.g., Upstart, RefiJet save avg $150/mo).
Banks: Reliable but higher rates; good for existing customers.
Avoid dealerships post-purchase; they add fees. Use aggregators cautiously, prioritizing official sites.
Alternatives to Refinancing
- Renegotiate current loan: Ask for rate reduction or term extension if hardship.
- Extra payments: Biweekly halves or round up to principal; saves thousands.
- Trade/sell: If upside-down, sell privately for max value.
- Lease or downsize: Lower payments on cheaper vehicle.
Biweekly payments equal 13 full payments/year, accelerating payoff.
Common Mistakes to Avoid When Refinancing
- Ignoring total interest: Focus beyond monthly payment.
- Not shopping around: Miss best rates.
- Overlooking fees: Prepayment penalties can negate savings.
- Extending term unnecessarily: Prioritize shorter terms.
- Refinancing too late: Vehicle may not qualify.
Frequently Asked Questions (FAQs)
Can I refinance if my credit score improved?
Yes, improved credit often secures lower rates, making refinancing worthwhile even if market rates rose.
Is there a prepayment penalty?
Check your loan; if yes, calculate cost vs. savings before early payoff or refi.
How much can I save?
Average $150/month or $4,800 lifetime; use calculators for personalized estimates.
Can I refinance multiple times?
Yes, if eligible, but lenders limit frequency; space 6+ months apart.
What if I’m upside-down on my loan?
Refinance harder; consider keeping car, extra payments, or selling.
References
- Everything You Need to Know About Auto Loans — The Penny Hoarder. 2023. https://www.thepennyhoarder.com/debt/how-to-finance-a-car/
- 7 Ways to Lower Your Car Payment & Help Your Budget — The Penny Hoarder. 2023. https://www.thepennyhoarder.com/save-money/lower-car-payment/
- How to Pay Off Your Car Loan Early — The Penny Hoarder. 2023. https://www.thepennyhoarder.com/debt/paying-off-car-loan-early-2/
- As More Car Payments Soar to $1000/Month, Here’s How… — The Penny Hoarder. 2023. https://www.thepennyhoarder.com/debt/1000-car-payment/
- How to Refinance a Car — It Could Save You $150/Month — The Penny Hoarder. 2023. https://www.thepennyhoarder.com/save-money/how-to-refinance-a-car/
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