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What are the Requirements to Refinance a Car?

Finance | 04/21/2022 22:00

There is so much talk lately about loan refinancing. The market rates are low, yet they are expected to rise throughout the year, so the time to refinance is prime. But what do you need to refinance your car loan? What are the requirements, and if you meet the requirements, how do you go about refinancing your vehicle?

Today we are talking about the requirements of car refinancing and how you can decide if a refinance is right for you.

If you are interested in refinancing your car, it will depend on three major factors: your credit, your car, and your current loan.

Refinance Requirement #1: Your Credit

Your ability to refinance your car will depend heavily on your current credit score. Credit scores are designed to rate your likeliness of paying back a loan. Lenders are in the business of making money, so the last thing they want to do is give a loan out to someone who will not pay them back. 

Making sure you have a good credit score is incredibly important when it comes to refinancing your car loan. Credit scores take five main categories into account:

  • Payment history (35%) Do you pay your accounts on time, or are your payments inconsistent and incomplete?

  • Amounts owed (30%) How much money do you owe? How much money do you owe in relation to how much credit you have available to you? This is called your credit utilization ratio, and it should ideally be below 30%.

  • Length of credit history (15%) How long have you had our accounts open for? The longer you have a history of having open accounts and consistently paying them, the higher your score will be.

  • Credit mix (10%) How diverse is your credit portfolio? A healthy mix of loans, credit cards, retail credit cards, mortgages, etc will help show lenders that you can balance having varying accounts open.

  • New credit (10%) Are you opening a lot of new credit lines? Are there a lot of inquiries on your credit score? A lot of new accounts can raise a red flag to lenders.

The most important categories of your credit score are the payment history and the accounts owed. Together they make up 65% of your score. Focusing on improving these areas can help boost your credit score. And you definitely want to make sure your credit score is as high as it can be before you apply to refinance your car. Here are our top tips for increasing your credit score:

  1. Make on time payments. This will help improve your payment history section. Even just 6-12 months of on time payments can make a drastic difference in your score. Try setting up auto pay on accounts that have that feature so that you never miss a payment.

  2. Pay down debt strategically. Your credit utilization ratio takes into account your total debt to available credit ratio as well as your debt to available credit ratio for each account. This means that if you have a credit limit of $10,000 with a balance of $2,000, and another account with a credit limit of $2,000 with a $1,000 balance, you should prioritize paying off the $1,000 balance. Even though you owe less money on that account, your credit utilization ratio is 50%, as opposed to 20% on the other account. Paying down your debt strategically can help your credit score tremendously.

  3. Request higher limits. Requesting higher limits on your credit accounts will help to reduce your credit utilization ratio. Lenders usually take this initiative and raise the limits for you, but it doesn’t hurt to ask. This can have a significant impact on your score.

  4. Check your credit report. You can check your credit report three times per year for free, once from each of the major credit agencies. Request your report and cross check it with your credit payments and histories. Did some payments get misreported as missed or late? Do all of the balances on your accounts add up? Is your personal information correct? If there are any discrepancies, report them to the bureau. This will also give you a chance to ensure there are no unauthorized accounts opened in your name. 

If your credit score has dropped drastically since your initial financing, you may not qualify for refinancing. If your score has dropped a little since your initial financing, you may qualify, but not qualify for a good APR

Because of this, you want to make sure that your credit score is in the best shape possible before you apply for car loan refinancing

Refinance Requirement #2: Your Car

Lenders almost always have requirements on the condition of your car when you want to refinance. If your car is more than ten years old or has more than 100,000 miles on it, lenders may think it is too risky to refinance. The older your car is and the more miles it has on it, the more likely it is to have something major go wrong. 

Depreciation is a major concern for many lenders. If your loan is underwater, meaning that you owe more on the car than the car is worth, you will most likely not be able to refinance your car. Keep an eye on depreciation throughout the life of your car loan to ensure that you are not in this situation. 

Refinance Requirement #3: Your Current Loan

There are a few terms in your current loan that will dictate whether or not you are able to refinance your car loan: the time left on your loan, your current payments, and prepayment penalties. 

The Time Left on your Current Loan

New lenders often have requirements about how much time is left on your current loan. If there is less than a year left on your loan, lenders may not choose to approve you. Car loans are front-loaded amortized loans, meaning that the majority of the interest is paid in the beginning of the loan. This means that as the loan nears the end, you are paying less and less in interest and more and more in principal. At a certain point it is not worthwhile for a lender to refinance you, as they will not really be making any money off of you. But keep in mind that at that point it probably won’t make sense for you either, as you won’t really be saving any money.

Prepayment Penalties

Your current loan may have prepayment penalties that may make refinancing your car difficult. Check your current contract closely to see if there are any penalties. If it’s unclear, then call your lender and ask them outright. If the prepayment penalties outweigh any savings from refinancing, it will probably not make sense to refinance even if you do qualify.

Your Current Payments

Staying current on payments matters for your credit score, but it is also something that new lenders will check specifically. They want to ensure that you are up to date on payments with your current lender. If you are not paying your current lender in full with consistency, it’s probably not in their best interest to refinance your car loan. 

I meet the car loan refinancing requirements; now what?

If your credit score is good or has improved, your car qualifies for refinancing, and your current car loan meets the above criteria, then you are probably wondering “how do you refinance a car loan?” The good news is it’s actually really simple!

Step 1: Do Your Research

Look around for a few different lenders that have good reviews. Look for a mix of traditional banks, credit unions, and online lenders. You will have to actually apply to get terms and rates for comparison, but you can do some of the legwork ahead of time and make sure their current customers are happy. If you want to save yourself a lot of hassle (and a lot of money!) contact Auto Approve and we can get the process started for you. We have relationships with hundreds of lenders across the country and can help get you the best offers. 

Step 2: Apply to a Few Different Lenders

The application process is similar to your original car loan application. You will need the following to get started:

  • A Photo ID, such as a passport or driver’s license.

  • Your vehicle’s information, which may include the bill of sale, VIN number, make, model, and year of your car.

  • Proof of income and financial history, which may include pay stubs, banking information, and your credit report.  

  • Proof of residence, such as a mortgage statement, lease agreement, or utility bill. 

  • Proof of insurance. 

(Just think: if you use Auto Approve, we can handle all of these tedious applications for you!)

Step 3: Compare Rates 

After all of your applications are submitted, you should start hearing back with different car loan APRs and terms. Compare all of the terms and see what offer is the best for you.

Step 4: Sign and Start Saving Money

Once you have picked the best car refinancing option, sign on the dotted line and start seeing the benefits of refinancing immediately. (And if you use Auto Approve for your car loan refinancing, we even handle the boring DMV paperwork!)

And those are the requirements of auto refinancing.

So don’t wait any longer; get started with Auto Approve today and pay less monthly when you refinance your car loan!


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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.