How to Refinance a Car Loan: A Step by Step Guide


Refinancing a car loan is a great way to pay off an auto loan quickly. But, is refinancing the right option for you?

You may consider this option if your financial situation has gotten better since you took out the loan to pay for your car the first time around. When you refinance your car loan, you are essentially getting a new loan with new terms to pay for the remaining balance from your current auto loan.

So, if you’re in a better place now, in terms of income or perhaps your credit score, then you’re probably going to get a loan with a better rate than the current one you have.

If you believe that refinancing your car loan is the best move you can make to pay off your current balances, you should know the first steps in preparing to refinance your car loan to ensure everything goes smoothly.

Learn how to refinance a car loan with the following steps:

  • Step 1: Review Your Current Situation
  • Step 2: Gather Your Personal Documents
  • Step 3: Apply For a Car Refinance Loan


Step 1: Review Your Current Situation

Although refinancing a car loan seems promising, the process may not always be the best option for everyone. You have a few things to consider before moving forward with refinancing:


How Is Your Current Financial Standing and Credit Score?

Since refinancing a car loan is all about getting a new loan to pay off your remaining balance, a better credit score will likely get you a lower interest rate. Combine your better credit score with your better income, and you could save more money over your new loan’s lifespan.

If your credit score hasn’t improved since you got your current car loan, you may have lower chances of getting a better rate. If you refinance your car loan with the same credit score, you may end up making more payments in the long run.

Your best chance to get a lower interest rate with the same (or lower) credit score is when interest rates, in general, have dropped since you got your car loan. So, it may be a good idea to check your credit score before anything else.

You can request a free copy of your credit report from the Annual Credit Report. You can get free credit reports from the three major credit reporting agencies:

  1. Equifax®
  2. Experian®
  3. TransUnion®

Note: Annual Credit Report provides free online credit report access weekly until April 2022 due to COVID-19. Take advantage of this promotion to stay updated on your credit standing.


Does Your Current Auto Loan Have a Prepayment Penalty?

Be sure to review your current car loan’s terms. You may have missed the part about prepayment penalties.

A prepayment penalty is a fee that you must pay if you ever settle your car loan too early. If you must pay extra when you pay off your auto loan ahead of schedule, then refinancing your car loan may not be worth the time and effort.

On a similar note, consider reviewing your current loan’s repayment schedule. You might want to stick with your existing auto loan if you only have a couple more months to pay off your original loan completely.

But, if you intend to extend your repayment schedule with a new loan, you could lower your monthly payments. Just remember that the interest rates may bring your overall total higher in the long run.


Are You Upside Down on Your Loan?

You’re upside down on your current auto loan if your outstanding balance is higher than your car’s actual market value. If that’s the case, refinancing may be difficult, or nearly impossible.

Meanwhile, if your car is worth more than what you owe, then you’re more likely to proceed with refinancing your loan. You can estimate your car’s fair market value by using the following online tools:

Even if you’re upside down on your loan, some lenders may approve refinancing. Sometimes, there will only be a slight difference between your new rate and current rate.

If you only get slight differences in your new loan, you might as well stick with your current loan to avoid paying more in the long run. You may also face higher debts if the credit union you choose for refinancing decides to roll your outstanding balance into your new car loan.


Step 2: Gather Your Personal Documents

Once you decide to move forward with refinancing your car loan, you need to prepare some necessary documents. If you’ve taken out a loan before, you should have an idea of what information you must have on hand.

  • Personal Information: These are the standard documents loan providers need when their clients take out loans.
    • Government-issued identification
    • Driver’s license
    • Social Security Number
    • Previous addresses
    • Proof of monthly mortgage or rent payments
  • Proof of Income: Income information is necessary to let lenders know that you are capable of repaying your refinanced car loan.
    • Paycheck stubs
    • Bank statements
    • Tax return information
    • Employment history
    • Information returns (form W-2 for employees; form 1099 for independent contractors)
  • Auto Loan Information: You may need to provide information on your current auto loan to prove you are refinancing from another lender.
    • Current lender’s information
    • Current auto loan balance statement
    • Current auto loan’s interest rate
    • Current auto loan’s length
  • Car Information: Preparing the details about your car will help your new loan provider determine how much you can get by refinancing your car loan. You can usually find your car’s make and model on the car’s windshield on the lower corner of the driver’s side.
    • Proof of auto insurance (insurance card)
    • Mileage information
    • Vehicle identification number (VIN)
    • Vehicle title
    • Vehicle registration information


Step 3: Apply For a Car Refinance Loan

You’re ready to apply for an auto refinance loan once you have all your information and are sure you want to proceed with refinancing.

You could shop around for the best deals and see if your local lenders offer pre-qualification. If you apply for pre-qualification, the lender will look at your credit information, financial standing, and car information.

Pre-qualification is like a soft inquiry. This type of consultation should not hurt your credit score too much, even if you inquire from different lenders (as long as you inquire within 14 days).


Love your car but not your car loan? Refinance your auto loan and lower your payments.


When you apply for a car refinance loan, you’ll need a complete loan application. This application is a hard inquiry, which may cost a few more credit points than a soft inquiry.

All the personal documents you prepared should come in handy and help make the refinancing process run smoothly. Plus, since you’ve already reviewed your current financial and credit situation, you shouldn’t have too much to worry about and have a good idea of how much you’ll be getting.

Since you’ll be applying for a new loan to pay for your existing loan, you’ll be transferring your car title to your new lender

With your new loan on your record, you can start paying off your old car loan and begin new monthly payments. You might want to confirm with your old car loan provider that you’ve already settled your account with them.

Once you’re in the clear with your old loan provider, you can focus on paying your new, potentially better car loan that you financed. With a better rate, you’re more likely to make payments on time, which may help boost your credit in the long run.


Recap: How To Refinance a Car Loan

Preparation is the primary step to refinance a car loan. You must consider all your options before following through with a new car loan.

Refinancing a car loan means getting a new loan to pay off your existing one. So, you should review your current situation and determine whether your current financial standing and credit scores will give you a better rate this time around.

You should also check your current loan’s terms and conditions. You may have missed some clauses that may lead to fees if you pay off your loan too early.

When you decide to move forward with refinancing, you should gather all the necessary documents that you would typically prepare when getting a loan. Include personal identification, current loan information, and your car information when collecting your documents.

We at 121 Financial Credit Union can help you determine if refinancing your car is the best option for your current situation. Contact us today at (904) 723-6300 to schedule an appointment and discuss your refinancing options.

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