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How to Refinance a Car Loan in 8 Easy Steps

6 minute read Young couple holding hands and leaning back on a small blue car.

Disclaimer: Upstart is not a financial advisor, the following content is for informational purposes only.

Did you know that refinancing debt is actually a common strategy for dealing with debt issues in your budget? If you’ve budgeted six ways from Sunday and still struggle to free up some cash, there’s another way that could be fruitful — and it’s actually in a surprising place: refinancing the debt you already carry. By changing the terms of a loan, you can have more money on hand in the short term or use it to build up your savings.

What is refinancing?

‘Refinancing’ can sound daunting, but it’s relatively simple when it comes down to it. You’ve probably heard of refinancing a mortgage, car loan, or even student loans. For right now, though, we’ll only talk about what refinancing means as it relates to car loans. 

What does refinancing a car loan mean? It really equates to paying off your current loan with a new one so you can take advantage of better loan terms—such as a lower interest rate, monthly payment, or shorter length of your loan.

How do you know if refinancing is right for you? In the rest of this guide, we’ll dig deep into the benefits of refinancing your car, how to know if it’s right for you, and how to make the application process as seamless as possible.

When should I consider refinancing?

Refinancing is potentially a great choice for you if you have solid credit and are able to take advantage of the benefits that come with refinancing.

You’re in the best position to consider refinancing when:

  1. Your credit score has increased
  2. Auto loan refinance rates have dropped
  3. Your monthly payment is too high

The benefits of refinancing

  1. Lower interest rate: Because interest rates fluctuate based on the market, you could potentially get a lower rate than the one you have right now. A lower rate may also be in the cards if you’ve improved your credit since you first bought your car.
  2. Lower monthly payment: If your repayment term stays the same and you receive a lower interest rate, that typically equates to lower monthly payments. Looking to lower your payment even more? You could get a new loan with a longer repayment term. Just keep in mind that it could mean higher interest over the life of the loan, so you’ll want to weigh the pros and cons of that decision. If your budget is tight right now, more money paid out over the long run might make sense for you.
  3. Pay off debt faster: If you have more money in your budget and some flexibility, you could choose a shorter repayment term. Shorter terms often mean lower interest rates, and you can save more money while knocking out your debt sooner—as long as you’re willing to settle for a monthly payment that’s more expensive.
  4. Cash from equity: If you have a lot of equity in your car, you may be able to refinance your original loan and get some cash to have on hand for other expenses. Equity is simply the difference between the value of your vehicle and the amount you owe on your existing loan. For instance, if your car is worth $11,000 and the balance on your loan is $5,000, you have $6,000 in equity.

How to refinance my car

1. Make sure it makes sense

Does it make sense to refinance? Here are a few things you’ll want to take into account when deciding if refinancing is the right move for you:

a. Penalties and fees: Will you incur any penalties and fees if you refinance? Some lenders charge a fee if you pay off your current auto loan early—known as a prepayment penalty. Lenders may also require an upfront fee when you refinance. The cost can vary, so you should compare it with your potential savings to make sure it’s worth it. If the fees eat up the savings, think again about refinancing or, check with lending platforms like Upstart, who don’t have any prepayment penalties or upfront fees.

b. Current loan balance: Is the balance on your current loan more than the value of your vehicle? If the answer is yes, getting a new loan with better terms could be challenging but not impossible. Upstart’s eligibility requirements allow your loan-to-value ratio to be higher than many lenders. 

c. Credit history: To get a new loan with the best terms, your credit history should be in top shape. We’ll explain in more detail later how you can dive deep into your credit reports and scores to ensure you’re in good standing.

d. Vehicle’s age: There are lenders out there who won’t refinance older vehicles — or those with high mileage; generally over 10 years old or 140,000 miles.

2. Examine your credit

If you’ve been making on-time payments for all your bills—including your current auto loan payment—it’s possible that your credit has improved, which makes qualifying for refinancing easier.

You have a couple of options for looking into your credit to make sure you’re all set:

  • Federal law gives everyone free access to their credit reports once a year from each of the 3 credit bureaus—Equifax, TransUnion, and Experian. You can download these reports from AnnualCreditReport.com to examine your past credit history, including any black marks that may affect your score, unauthorized accounts, and incorrect information. Errors in your history may impact your score, so be sure to dispute them. If the agency can’t verify the information, they will remove it from your reports.
  • Your credit reports do not include your credit scores. Check with your credit card company, as many offer updated scores on your monthly statement or online account. There are also several websites that offer free scores — just be sure to look closely at their terms before you sign up.

3. Collect important documents and information

You may need to compile several documents before you fill out any applications. Here are the most common:

a. Personal information: You’ll need your name, date of birth, social security number, and current address  Depending on your state of residence, you may also need a photo of your driver’s license.

b. Proof of income
: Pay stubs from your current employer and/or proof of employment will work. You may also need copies of your tax returns.

c. Vehicle and insurance information: Vehicle Identification Number (VIN), make/model/year of your car, your car’s mileage and your proof of insurance should do the trick here.

d. Current loan information: While typically not required for your refinancing application, make sure you have information on the terms of your current loan. This includes lender, current monthly payment, remaining balance, loan term, and interest rate to be able to best evaluate the opportunity for savings.

4. Compare offers

If you’re going to go through the process  of refinancing your car loan, you might as well shop around. Comparing offers from different lenders is the best way to get the most bang out of your buck. 

Some lenders may ask you for a full credit check before offering any rate information—some lending platforms, like Upstart, offer rate checks without impacting your credit score*. 

If that happens, don’t be too concerned — if you submit multiple loan applications within a short window of time (like 2 weeks) then FICO will often combine all of them into one when calculating your credit score. But if you still feel uneasy about it, you may want to stick with financial institutions where you can get prequalified.

Here’s a short list of details to consider as you compare offers:

  • Interest rate
  • Repayment terms
  • Fees
  • Any other factors that are important to you

5. Submit loan applications

Now that you’ve done your research and collected all of your important documentation, it’s time to submit your applications. There are typically a few different ways of doing this, depending on the lender. You’ll likely be able to submit your application online or over the phone, but some smaller lenders may ask you to do it in person.

6. Check out your savings

Using an auto loan refinance calculator will help you see how much money you’ll save each month and your total savings once you’ve paid off the loan in full. You’ll just need to enter information about your current loan — including amount, interest rate, length of the loan, remaining balance, amount of time left until the loan is paid off — and the repayment terms for your potential new loan.

7. Evaluate loan terms

Make sure that the loan terms are what you’re looking for, whether that’s keeping the payment the same for a shorter loan term or lowering your payments with a longer loan term.

8. Finish the process

Congratulations — at this point, you’re nearly done! Once you’ve been approved, your new lender will send you the loan paperwork with any additional requests for information. Your new financial institution will then pay off your old car loan, work with the DMV to transfer the title, and you’ll start making payments on your new loan with the terms you’ve settled on.

The bottom line

Refinancing doesn’t have to be scary — as long as you take your time and do your research to consider whether it’s the right move for you, you’ll be golden. Ready to take the plunge? Dive in to see how Upstart can help you.

Car refinance loans not available in IA, MD, NV, or WV.

*When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information will be reported to the credit bureaus.

Simple and easy car refinance through Upstart.

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* When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information will be reported to the credit bureaus.

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