What is Refinancing a Car? Ultimate Guide to Car Refinancing

Car payments eating up too much of your monthly budget? Car refinancing could be the budget hack you haven’t tapped into yet.

Auto loan refinancing means replacing your current loan with a new one, typically with better terms. It’s like getting a bit of a do-over, and who doesn’t love a second chance to save some cash?

In this guide, we’ll walk through everything you need to know about what is refinancing a car – from the basics to the benefits, the ideal timing, and how to navigate the process like a pro. 

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MoneyLion can help you explore auto loan refinancing options. Based on your financial profile, you can get matched with offers from top lenders and compare interest rates, loan terms, and fees to help you find the best way to refinance your car.

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What does refinancing a car mean?

Refinancing a car loan is essentially trading in your existing auto loan for a new one with different terms. The new loan is used to pay off your original loan, and you begin making payments on the new loan. It’s that simple.

The key differences typically involve:

• Interest rate: Often the primary motivation for refinancing
• Loan term: The length of time you have to repay the loan
• Monthly payment amount: Usually decreases with a lower rate or longer term
• Lender: Your new loan will be with a different financial institution

The goal of auto refinancing is usually to lower your interest rate, reduce your monthly payment, or change the duration of your loan. It can also be used to add or remove a co-signer or access better terms after improving your credit.

It’s worth noting that refinancing isn’t a magic solution for every situation. The process involves a new credit check, potential fees, and paperwork. For refinancing to make financial sense, the money you save should be more than what you spend on the refinancing process, especially in the long run. 

Be sure to calculate your total cost over the life of the loan, not just the monthly payment. A longer term might lower your monthly payment, but could cost you more in interest over time. 

Why refinance your car loan?

People don’t just refinance for the fun of it (although potentially saving money can be pretty exciting). Here are the main reasons why refinancing a car loan might make sense for you:

Lower your interest rate

If interest rates have dropped since you got your original loan, or if your credit score has improved, you might qualify for a significantly lower rate. Even a small rate reduction can translate to hundreds or thousands of dollars saved over the life of your loan. It can be helpful to use an auto loan refinancing marketplace to explore different interest rates and terms to find the best fit. 

👉 How to Get a Lower Interest Rate On A Car Loan

Reduce your monthly payment

Need to free up some cash flow? Refinancing can lower your monthly payment by securing a lower interest rate or extending your loan term. That extra breathing room in your monthly budget could be just what you need to tackle other financial goals, such as an emergency fund or paying of a medical bill.

Shorten your loan term

If your finances have improved since you took out your original loan, you might want to refinance to a shorter term. While this might increase your monthly payment, but you’ll likely pay less in interest overall and own your car outright sooner.

Change your lender

Sometimes the relationship with your current lender isn’t working out. Perhaps their customer service is lacking, their payment system is difficult to use, or they don’t offer the features you want. Refinancing gives you the opportunity to switch to a lender that better meets your needs.

When is the best time to refinance your car?

Timing is everything, especially when it comes to refinancing a car. Here are some ideal scenarios for when to consider refinancing your auto loan:

When interest rates drop: Keep an eye on market trends. If auto loan interest rates have fallen significantly since you got your loan, it might be time to make your move.

When your credit score improves: Have you been diligently paying bills on time and reducing debt? If your credit score has climbed since you took out your original auto loan, you could qualify for much better rates now.

After you’ve made on-time payments for 6 to 12 months: Lenders like to see a history of responsible payment behavior on your current loan before offering you a new one. Having 6 to 12 months of on-time payments under your belt could put you in a stronger position to negotiate better terms.

When you need to adjust your monthly budget: Life happens – maybe you’ve had a change in income or new expenses have cropped up. If you need to reduce your monthly payment to accommodate other financial priorities, refinancing a car loan could help you restructure your debt. Just make sure the costs 

Your car has positive equity: If your car is worth more than what you owe on your loan, you have positive equity and that can help with loan approval and favorable terms. It’s often the best way to refinance a car, especially if you’re also lowering your interest rate or adjusting your term.

👉 When Should You Refinance a Car Loan? 7 Signs It’s Time

When shouldn’t you refinance your car?

While an auto refinance can be a smart move, there are times when it may not make financial sense. Consider holding off if any of these situations apply to you.

Your car loan has prepayment penalties: Some loans include penalties for paying them off early. Check your current loan agreement to see if these penalties would outweigh the benefits of refinancing.

You’re near the end of your loan term: If you’re in the final year or so of your auto loan, refinancing might not save you money. Most of your payment at this point is going toward the principal rather than interest, so the potential savings are minimal.

Your car is older or has high mileage: Lenders typically have vehicle age and mileage restrictions for refinancing. If your car is older than 7 to 10 years or has more than 100,000 miles, you might have difficulty finding a lender willing to refinance.

Your loan is underwater: If you owe more on your car than it’s currently worth (negative equity), refinancing can be challenging. Most lenders won’t finance more than the vehicle’s value, which means you might need to pay the difference out of pocket to refinance.

👉 Is Refinancing a Car Worth It? Pros and Cons to Consider

Steps to refinance a car loan

If refinancing sounds like a good fit, here are the steps to refinance a car so you know what to expect. You can also check out our complete guide on how to refinance a Car Loan in 7 Steps

1. Check your credit score and report

Before starting the process, know where you stand. Check your credit score and review your credit report for any errors that might need to be addressed. The better your credit, the better the refinancing terms you’ll qualify for.

👉 How to Refinance a Car Loan with Bad Credit

2. Gather your documents

Every lender is different, but in general, you’ll likely need:

• Your driver’s license
• Vehicle information (VIN, make, model, year, current mileage)
• Proof of income (pay stubs, tax returns)
• Proof of residence
• Details about your current loan (lender, account number, remaining balance)
• Proof of insurance

3. Shop around for lenders and compare offers

Don’t just go with the first offer you find! Shop around with different types of lenders. Consider offers from banks, credit unions, and even online lenders. One of the easiest ways to compare multiple offers for an auto loan 

Many lenders offer pre-qualification with just a soft credit pull, allowing you to compare potential rates without impacting your credit score.

4. Evaluate loan offers

When comparing offers, look beyond just the monthly payment. Make sure to also consider:

• Interest rate
• Loan term
• Total interest paid over the life of the loan
• Fees (application fees, origination fees)
• Any applicable prepayment penalties

The lowest monthly payment isn’t always the best deal if it means paying thousands more in interest in the long-run.

5. Accept the best offer and finalize the loan

Once you’ve selected the best refinancing option, complete the formal application process with your chosen lender. They’ll guide you through the final steps, which typically include:

• Signing loan documents
• Setting up payment methods
• Completing the title transfer process

How refinancing a car can affect your credit score

When you refinance your car loan, your credit score may experience some changes. Here’s what could happen:

In the short run

• Hard credit inquiries from loan applications may drop your score by a few points
• Your average account age decreases when you open a new loan, which can temporarily lower your score

Over time

• Consistent on-time payments build a stronger payment history
• Better loan terms can help you manage debt more effectively, potentially boosting your score

Don’t stress too much about the initial dip in your credit score. These effects are typically small and temporary, while the benefits of better loan management can improve your financial health for years to come.

Ready for a Refi Reset?

What happens when you refinance a car? You get a fresh start with new loan terms, possibly a lower rate, and maybe even a little extra room in your budget. Whether you’re ditching high interest rates or breaking free from a co-signer, refinancing a car loan is all about regaining control of your finances.
Before deciding whether to refinance, it’s important to understand the pros and cons of refinancing a car. Be sure to check the numbers, read the fine print, and only move forward if the savings make sense.

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