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How to Refinance a Car Loan in 5 steps

Finance | 02/17/2022 23:00

Refinancing your car loan may seem overwhelming. You know you can save a lot of money by doing so, but it’s hard to know where to start.

While it may seem complicated, refinancing is actually quite easy (and quick!) So if you are thinking about refinancing your car loan, follow our five simple steps and start saving money today!

If you want to refinance a car loan, follow these five easy steps.

1. Decide if refinancing is right for you

First off, you need to figure out if refinancing is right for you. There are a few different things you will need to consider. 

How much time is left in your loan?

While you are able to refinance your loan at any time, there are certainly times where it makes more sense to do so. Experts recommend waiting between six months and one year to refinance. This will give your credit score a chance to bounce back after the initial hard inquiries, and will give you an opportunity to make consistent payments. All of this will lead to securing a lower APR.

Refinancing your car loan is more beneficial to you the earlier you do it. Car loans are front-loaded interest bearing loans, meaning that in the beginning of the loan more of your payments go towards interest payments, and towards the end of the loan more of your payments go towards the principal. So the earlier you refinance, the more you will affect the amount of interest you are paying. 

It is most likely not worthwhile pursuing refinancing if you have less than a year left on your original loan. At this point most of your payments will be applied to the principal. But it is always a good idea to do the math yourself to decide if you will save money or not.

Does your loan have prepayment penalties?

If your original loan has penalty payments for paying off your loan early, it may not be worth it for you to refinance your car loan. Read the terms of your current loan very carefully to determine what the penalties may be. If you are unclear on the prepayment penalties of your loan, be sure to contact the lender to find out.

Has your credit improved?

If your credit score has improved, you will be more likely to secure a lower interest loan. If your credit score has not improved, refinancing might not be worth it. 

Your credit score depends on the following categories:

  1. Payment History (35%)

  2. Accounts Owed (30%)

  3. Length of Credit History (15%)

  4. Credit Mix (10%) 

  5. New Credit (10%)

The most important factors in your credit score are your payment history and your accounts owed, also known as your credit utilization ratio. If you have been more consistent with on time, full payments, your credit score may have increased a good deal. If you have paid down some of your debts and lowered your credit utilization ratio, this also may have increased your credit score significantly.

Check your credit score to see where you are at. Better yet, get a copy of your credit report. You can get a copy of your credit report for free three times per year. Read through it thoroughly to check for errors and report any discrepancies. Catching errors early on can save you from a huge headache in the future.

Are the market rates good?

Interest rates depend greatly on the market rates in general. If you first secured your loan when the rates were high and they have now decreased, it’s probably worth looking into refinancing. 

Pro Tip: Market rates are set to increase this year, so now is the perfect time to refinance your car.

Is your car eligible?

You need to ensure that your car is eligible to be refinanced in the first place. If your car is more than eight years old or has more than 100,000 miles on it, you may not be able to refinance.

2. Get all of your information together

If you’ve gone through the details of your loan and your credit report and determined that it does make sense for you to refinance, you will need to gather up all of the necessary paperwork. You will need the following information:

  • Your information. This will often include your ID, social security number, and proof of residence (not a PO Box).

  • Your car’s information. You will need to know the make, model, year, VIN (vehicle identification number), and mileage of your car.

  • Proof of income. You will need proof of employment, like recent pay stubs. 

  • Proof of insurance. Your lender will want to be sure that your car is insured.

  • Loan information. You will need all of your current loan information, including the balance and the lender’s contact information.

3. Look for lenders and start applying

Once you have all of your documents together, you can start looking around at different lenders to refinance your car loan. You won’t really be able to compare rates and terms until after you apply and the offers start coming in. You should try to apply for refinancing with three to five different lenders. This will give you a few options to choose from, as well as give you some negotiating power. Start by looking around at a dozen or so lenders, including credit unions, traditional banks, and online lenders, and whittle your list down from there. Keep your eyes open for deals, and try to get your list down to three to five lenders.

Be sure to apply for all of your loans at once. When you apply for financing, it triggers a hard inquiry on your credit report that will affect your score negatively for about a year. If you apply for all of your loans within a fourteen day period, they will count as one hard inquiry on your credit. If you were to space out your applications, it would count as multiple hard inquiries and affect your credit score negatively.

Pro Tip: Using a company that specializes in auto refinancing, like Auto Approve, is the most efficient way to apply for refinancing. They have relationships with top lenders across the country so they can be sure to get you the best rates possible. Plus, they handle the paperwork so you don’t have to.

4. Choose the best lender

Once you have all of your offers, you will have to decide which one works best for you. Be sure to consider the following when making your decision:

  • The interest rate. Who is offering the most competitive interest rate?

  • The prepayment penalties. Are there restrictive prepayment penalties? There is no limit to the amount of times that you can refinance, so keep in mind that you might want to refinance again in the future.

  • Your cash flow and the repayment terms. Do you need a longer repayment plan because your cash situation is a little tight? Or would you prefer a shorter repayment plan so that you can pay off the loan faster and pay less overall? You will have a choice within each loan offer, so compare all of your options to see what makes sense for you.

  • Customer satisfaction. Look at each lender and check them out on websites like Better Business Bureau and TrustPilot. Are their customers happy, or are they frustrated? Do they have clear and concise communication with their customers, or are there hidden fees and delayed correspondence? Take all of this into consideration when deciding on a lender.

  • Hidden fees. Look over the terms to see what additional fees you are being charged. Are there high administrative fees? Do they charge processing fees? Read all of the fine print to be sure you are not missing anything.

There is a lot of information to consider, so determine what is most important to you when it comes to choosing a lender.

5. Finalize documents

Once you’ve picked a lender, it’s time to sign all of your documents. Most lenders and refinancing companies will take care of most of the paperwork for you. This will involve paying off the balance of the old loan and beginning payments on the new loan. It’s always good to reach out to the previous lender to ensure the loan was paid off in full. 

At Auto Approve, we know what a headache all of the paperwork can be. That’s why we collect all of the documents you need and send them to you electronically. All you need to do is e-sign and we handle the rest (even the DMV paperwork!)

And that’s how you can refinance your car loan in five easy steps.

Refinancing your car loan doesn’t need to be scary or overwhelming. We’ve designed Auto Approve to be a one-stop-shop for your refinancing needs. All you need is your personal information and your car’s information, and that’s it! We will shop around for quotes and help you decide what makes the most sense for your situation. Just follow our five steps and you will be saving money in no time at all. 

Don’t wait, get started today!


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*APR and Fees Disclosure: Auto Approve works to find you the best Annual Percentage Rate (APR), which is based on factors like your credit history, vehicle and desired payment terms. Fees to complete your loan refinance vary by state and lender; they generally include admin fees, doc fees, DMV and title. Advertised 6.24% APR based on: 2019 model year or newer vehicle, 730 minimum FICO credit score, and loan term up to 72 months. All loans subject to credit and lender approval.
Auto Approve has an A+ rating with the BBB and is located at 2860 Vicksburg Lane North Plymouth, MN 55447. Auto Approve works to find its customers the best terms and APR, which are based on factors like credit history, vehicle, and desired payment terms. Loan amounts, costs, and fees vary by state and lender; they generally include admin fees, doc fees, DMV, and title fees, depending on the lender and period of repayment. There is no fee to obtain a quote and all refinancing-related costs are included in the amount financed so there are no out-of-pocket costs! For more information, please go to AutoApprove.com.