Contributing Experts
Ginny Scales Medeiros
Ginny Scales MedeirosAuto Finance Consultant View bio
John Schleck
John SchleckBank of America View bio

This guide was written by

MoneyGeek Staff

It may not seem like it, but sometimes replacing your current car loan with a new one may help you save money the same way refinancing a mortgage can. If you’re able to refinance for a lower interest rate or shorter term, there’s a good chance you’ll be able to save hundreds or even thousands of dollars each year. Learn more about auto loan refinancing options, including how it all works, and get expert advice to help you determine if refinancing is your best bet.

Can Refinancing Save You Money?

“The primary purpose of refinancing an auto loan is to lower payments and the overall cost of the loan,” says John Schleck, an executive in charge of centralized and online consumer lending at Bank of America. “A lower payment can help ease the strain on your monthly budget.” If you’re not sure whether refinancing will save you money, use the auto refinance calculator below to see how a change in your loan term and/or interest rate can affect your monthly payments before you start shopping around.

Refinancing calculator

Current loan
Current loan balance*
$
Monthly payment*
$
Interest rate*
%
Refinance loan
Refinance amount*
$
Length of term (months)*
Interest rate*
%
* Required

MONTHLY PAYMENT

INTEREST REMAINING

  • Current loan
  • New loan

An important note about this calculator: The results provided by this calculator are for illustrative purposes only.

The information provided is not a guarantee or indication of eligibility for an auto loan from a financial institution.

For individualized and specific details, consult a qualified financial professional.

Should You Refinance?

Every situation is different, so it’s important to take a good look at your own financial situation and goals if you’re looking to refinance. The following quiz can help you figure out whether refinancing is a good idea. Keep in mind, though, that some factors may prevent you from refinancing your vehicle loan – for example, if you owe more on your car than what it’s worth. In this case, a lender likely won’t give you another loan because if you default, they’d lose money. You can check the value of your vehicle on industry resources such as Kelley Blue Book.

Is Refinancing Your Auto Loan a Good Idea?

  • 1

    Have interest rates dropped since you purchased your vehicle?

    1 / 8
    2

    Has your credit score improved since you purchased your car?

    2 / 8
    3

    Is your vehicle model seven years old or newer?

    3 / 8
    4

    Do you owe $7,500 or more on your current loan?

    4 / 8
    5

    Have you experienced a drop in income recently?

    5 / 8
    6

    Do you meet all refinancing requirements?

    6 / 8
    7

    Can you can get a lower interest rate and/or a shorter loan term?

    7 / 8
    8

    Are you a preferred customer with your current bank?

    8 / 8
  • RESULT:
    Yes! Based on your responses, refinancing might save you money. With a solid credit score and a qualifying vehicle and loan, you can pursue a range of car loan refinance options with different lenders. Even if you can shave off just a percentage or two from your original rate, you can likely save money over the life of the loan. And being a preferred customer with your bank can save you more. Using Bank of America as an example, Schleck says you may qualify for an interest rate discount if you’re a B of A Preferred Rewards or Banking Rewards for Wealth Management customer. According to Schleck, however, each lender has its own set of refinancing requirements, so review those details carefully.
    Based on your responses, now does not seem like a good time to refinance your auto loan. However, keep reading to find out when might be a better time and what you can to do prepare.

Auto Loan Refinancing Options

You might be looking to save money on your monthly payments, adjust the length of your auto loan or free up extra cash to handle a financial emergency. Your needs will determine what kind of refinance you choose.

“Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month, but you may pay more in interest in the long run,” says the Bank of America’s Schleck. “On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.”

Whatever goal you have in mind, review your refinancing options carefully before signing on the dotted line. There are two primary types of auto loan refinancing:

Traditional

The lender pays off your old loan and provides a new loan with new terms. These loans have a fixed interest rate and fixed monthly payments for terms typically ranging between three and seven years.

Ideal candidates:

If interest rates have dropped or your credit score has improved and you want to 1) lower your monthly payments and/or 2) save money over the life of the loan, refinancing your auto loan could be the right choice for you.

Example:

Dominique purchased her vehicle two years ago for $22,000 and received a loan at a 12 percent annual percentage rate, or APR, with a 60-month term. She recently paid off her credit card debt and has seen her score jump by 50 points. Applying for traditional refinancing through her credit union, she received a 5 percent interest rate for a new loan with a 60-month term and saw her monthly payments drop by $212 per month.

OR
Cash Back

Cash back refinancing works exactly like traditional refinancing, except you borrow against the equity you have in your vehicle. If the value of your car is higher than what you owe on it, that difference is your equity. Let’s say you’re financing your car with a $9,000 loan, but it appraises for $13,000. This means you have $4,000 worth of equity you can borrow against. In cash back refinancing, you receive a check for the amount you want to borrow from your vehicle. This amount is added to your new loan, and you receive an updated interest rate, monthly payment and term.

Ideal candidates:

Many financial experts recommend against cash back refinance auto loans, but if you’re in a tight financial situation, such as needing to fix a leaky roof before winter hits or cover unexpected costs, you may be able to use a cash back loan to your advantage. Cash back refinancing is subject to credit regulations and most lenders have strict policies regarding the types of cars and loans they refinance. Regulations typically state:

  • You must have at least two years left on your existing car loan
  • You must owe $7,500 or more on your current loan
  • Your current vehicle is less than 5 to 7 years old
  • Your vehicle has 75,000 or fewer miles on it
Example:

Mark purchased a new vehicle in 2012 for $19,000 with a 2.9 percent interest rate and a 60-month term. He has paid down his loan quickly in the past four years and now owes just $8,000. The vehicle’s value qualifies for a loan amount of $14,000, providing him with $6,000 in potential equity. After being injured on vacation, he has several large medical bills to pay. He decides to borrow 11,000 and keep $3,000 from his car equity to help cover medical expenses. After refinancing, he has a new loan with a balance of $11,000, an interest rate of 1.9 percent and a new loan term of 60 months.

How to Refinance

The car loan refinance process is straightforward with a simple application process. However, to get the best interest rate and loan possible, you’ll need to take these steps.

Step 1:Get it Together (Your Personal Information, That Is)

This information will be used by every lender during the credit check and refinance process, and typically includes:

  • Driver’s license
  • Date of birth
  • Social Security Number
  • Email address
  • Home address
  • Residence status (whether you rent or own)
  • Previous address (if you’ve lived in your current address for less than three years)
EXPERT TIP

“When your credit score is not great, personal stability can be the difference between an approval and rejection,” says auto loan finance consultant Ginny Scales Medeiros of Fulton, California. If you have moved recently, lenders could hold that information against you. Remember, Medeiros notes, “the lender owns the vehicle and wants to be fairly certain they can find it if you stop making payments.”

Step 2:Gather documents that verify your employment and income

Lenders will want to review this information to see if you can keep up with your car loan payments. Relevant paperwork often includes:

  • Employer name
  • Occupation
  • Employment status (full-time, part-time or unemployed)
  • Work phone number
  • Previous employer information if you’ve been at your current job less than three years
  • Proof of employment and two recent pay stubs
  • Statement on gross monthly income and all income sources
  • Mortgage or monthly rent payment
EXPERT TIP

“Your job status is right up there with credit history in the lender’s decision to approve your refinance,” says Medeiros. “I see long-term jobs compensate for bad credit all the time, with the same credit file being turned down if the applicant is in a short-term job.”

Step 3:Have your vehicle information on hand

When applying, you’ll need to provide information regarding your vehicle and current loan, so make sure you have these details ready. This includes:

  • Current lender
  • Loan balance and time remaining on the loan
  • Payoff amount
  • Interest rate
  • Vehicle make, model and license plate number
  • Vehicle’s market value
Step 4:Review your credit history and score

Lenders will determine your creditworthiness by looking at your credit history and score. Before applying, pull your full credit report to make sure your information is correct and to get an idea how lenders might assess you. You can do so for free once a year through AnnualCreditReport.com. If you need to correct errors on your report, keep in mind that doing so will delay your refinance, so pull your report early so you have enough time to dispute mistakes.

Step 5:Apply and compare multiple offers

Medeiros encourages consumers to explore multiple offers from different lenders in order to get the best option. You can apply directly with banks and other lenders or use online car loan companies to get a quote. Medeiros warns, though, you should only let a lender run your credit when you come across a solid offer. Each time your credit is run outside a 15-day window, your credit score will be dinged.

Step 6:Negotiate

According to Medeiros, lenders want to make your auto refinance work. “They are competitive so have multiple programs designed to fit almost everyone’s situation; take advantage of that,” she says. Examine each offer closely and look for dealer incentives before agreeing to a new auto loan. Medeiros also says factory rebates can help, especially when your current loan is higher than what your vehicle is worth. Lastly, if you’re stuck financially, some dealers will allow you to defer your down payment, providing you with greater financial flexibility.

Step 7:Evaluate contracts and finalize your loan offer

Carefully review your refinance auto loan offer. “The biggest mistake you can make is getting yourself into a worse situation, such as taking out a longer loan term on a car that is not in great condition or financing a larger amount and not being able to sell or trade the vehicle in the future,” warns Medeiros. Make sure your new loan is actually going to benefit you in the long run. If it isn’t, keep looking or stick with your current loan.

Tips for Refinancing When You Have Bad Credit
  • Fix credit discrepancies

    Review your credit history and contest any errors weighing down your credit score by writing the credit bureaus or using their online reporting tool. But start doing it well before you need to refinance your vehicle. Be aware that you may have to wait 30 days for a response. Until the dispute is “settled” – that is, removed from “dispute status” – you may not be able to refinance.

  • Make payments on-time

    Missed and late payments can undermine your score still further, so pay your current auto loan and other lines of credit on time.

  • Pay down credit card debt

    Paying down credit cards to below 20 to 30 percent, or zero, of their limit could boost your score by 40 to 100 points.

  • Avoid large purchases

    Before refinancing, skip large purchases requiring credit.

  • Eliminate accounts in collections

    Medeiros said often times, consumers with low credit scores have multiple collections for amounts under $50. If you fall under this category, pay these off as quickly as possible.

  • Ask questions

    When shopping around, ask banks and credit unions if they have lending programs for consumers with bad credit. Such options may give you more favorable terms and conditions.

Benefits vs. Risks

Refinancing an auto loan offers great benefits to borrowers, but can also be risky. “Cars are a depreciating asset,” Medeiros explains. “You could easily find yourself in an underwater loan, where you owe more than what the vehicle is worth.” Learn more about the benefits and inherent risks of auto loan refinancing.

Benefits
Benefit Explanation
Lower interest rate With a good credit score, refinancing can get you a lower APR, which means you’ll pay less for the vehicle even if your repayment term doesn’t decrease.
Lower monthly payment If you extend your loan term and/or reduce your interest rate, you could lower your monthly payments for the remainder of the loan. Extending your loan, however, may mean you’ll end up paying more for the car overall.
Remove a co-signer from an existing loan By refinancing, you can remove a co-signer from your original loan and qualify for your own loan at a better rate if your credit has improved.
Get a new loan term Terms of your original loan may be for four, five, or six or more years. When refinancing, you can change the length of your loan term – either lengthening it to lower your monthly payments or shortening it to pay off your vehicle more quickly.
Free up cash If you’re in need of some cash, you may be able to borrow the maximum lending limit, pay off your car loan and have some cash left over in the end. The amount you still owe must be less than the car’s market value, however.
Risks
Risk Explanation
Prepayment penalties Some auto loans include prepayment penalties which require you to pay a percentage of the remaining interest on your auto loan, even if you pay off your loan early. “If you’re subject to this, do the math: If the amount you save by refinancing is significantly greater than the penalty, refinancing may still be a good idea,” says Schleck.
Limited financing options Banks and other lenders may limit the amount they finance based on your credit score, the market value of your vehicle or the car’s age. As an example, some banks will not refinance cars older than five or seven years or cars with mileage beyond a specified limit (e.g. 100,000 miles).
You’ll be stuck with a depreciating asset Cars lose value over time. If you refinance your vehicle for a longer loan term, you could end up with an upside down car – a scenario in which your loan is more than the value of the vehicle. “If you want to trade in an upside down car, you’ll either have to come up with the money or have the negative equity rolled into your new loan,” Medeiros warns.
Your loan term may be extended, which means you’ll end up paying more for your car A refinanced auto loan may reduce your monthly payments while also extending your term, which means you’ll pay more, overall, for your vehicle. “Typically, there is more financial benefit to staying with your same loan term or shortening it,” says Schleck.

Alternatives to Refinancing

Sometimes your credit score doesn’t get you a more favorable interest rate or the terms you’re approved for aren’t much better. In these cases, refinancing may not be the best option. However, there may be other financial alternatives. “For some consumers, using a home equity line of credit or alternative financing sources may be viable ways to lower costs,” says Schleck. “It’s a good idea to investigate all options, considering specific financial goals and your situation to make an informed decision with an aim toward lowering short- and long-term costs.” Below are a few alternative options you may want to look into:

Option #1 Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) allows you to borrow against the equity in your home. Your home serves as collateral and the HELOC functions much like a credit card, allowing you to pay off your existing auto loan. When setting up a HELOC, you establish the amount to borrow, the draw period and the length of the repayment period. The draw period is typically between five and ten years, with repayment periods lasting between ten and thirty years.

Benefits
  • HELOC interest rates are traditionally lower than standard auto loans
  • Interest is tax-deductible (if you itemize your tax return)
  • You can borrow between 70 and 85 percent of your home’s value
  • You can make interest-only payments to save on your monthly payments
  • You can pay off the loan at any time
Negatives
  • HELOC interest rates are variable, meaning rates can increase with market changes
  • Lenders can adjust or freeze a HELOC if your financial situation changes
  • The long repayment period means you’ll likely have a loan that outlasts your vehicle
  • Because a HELOC decreases your home’s equity, you could end up with an underwater mortgage if housing market prices tumble
  • If you cannot make your monthly HELOC payments, you could lose your home to foreclosure
Option #2 Peer-to-Peer Loan

Peer-to-peer lending, also known as P2P loans, can be an attractive alternative. Born out of the Internet, peer-to-peer lending cuts out the middleman – banks and credit unions – and brings together investors and individual borrowers. The application process is short and straightforward – you visit a P2P site such as Prosper.com or Lending Club and complete a short application. Once you qualify, you receive a list of potential loans, along with the interest rates and repayment term. When you select a lender, you finalize the lending process and a cash deposit is made in your bank account. You can then use these funds to pay off your existing auto loan.

Benefits
  • Short application and faster fund-distribution process
  • Individuals with poor credit can usually secure P2P financing
  • Loans are unsecured, so don’t have vehicle eligibility requirements and vehicles cannot be repossessed if you default on the loan
  • No need to deal with banks, credit unions or dealership financing departments
  • Negatives
    • Extremely high interest rates for those with poor credit scores
    • There are usually limits on the amount you can borrow (between $35,000 and up to $40,000)
Option #3 Trading in Your Vehicle

Sometimes trading in your car can get your better financial options. However, if you have an existing balance, the dealer will roll that amount into your new car loan. For example, if you owe $6,000 on your loan and the dealer gives you $4,000 on your trade, they will add the remaining $2,000 to your new car loan.

Benefits
  • You can get rid of a vehicle that has an upside down loan
  • You can qualify for lower interest rates
  • You can lower your monthly payments by choosing a more affordable vehicle
  • You can find new car incentives that could cover the balance of your existing negative equity
  • May provide immediate financial flexibility
Negatives
  • You typically receive less than if you sell the vehicle yourself
  • You roll any negative equity into your new car loan
  • You could end up with higher payments if you carry over a high balance and will be making payments towards a car you no longer have
Option #4 Selling Your Vehicle

Sometimes the best solution is getting rid of your car all together. However, if you have an existing auto loan, your lender holds the title, which can make the selling process slightly complicated. When selling to a dealer, they will appraise your car and give you an offer. If the offer is less than the balance of your auto loan, you’ll have to pay the difference before the dealership purchases the vehicle. From there, the dealer will handle the rest of what you owe your lender.

If you sell to a private party, the process can also be challenging. Buyers may be hesitant to purchase a vehicle that has an existing loan on it. If your buyer is local, you could go to the bank, have the buyer pay the lender directly and receive ownership of the title. Again, if you are upside down on your loan, you still have to cover the balance of what you owe on the vehicle.

Benefits
  • You’re free from your current auto loan
  • You can make a profit if your car is worth more than what you owe on your loan
  • You’ll likely use more public transportation options, at least temporarily, and lower your carbon footprint
Negatives
  • You have to cover the balance of an upside down loan
  • A dealership may offer you less than what you think the car is worth
Updated: June 8, 2017