Drive Down Your Payments: A Step By Step Guide To Auto Loan Refinancing
If you’re still stuck with a high interest rate on your auto loan, refinancing can slash your monthly payment and save you hundreds—or even thousands—of dollars over the life of the loan. Follow these nine steps to refinance like a pro, using trusted resources to compare offers, calculate savings, and avoid common pitfalls.
1. Understand Why & When to Refinance
Refinancing makes sense if you can:
- Lower your APR because market rates have fallen or your credit score has improved.
- Adjust your term—extend it to reduce monthly payments or shorten it to pay off your car faster.
For unbiased advice on when to refinance, see the CFPB’s Auto Loans overview.
2. Check Your Credit & Loan Details
- Get your free annual credit report at AnnualCreditReport.gov and review your score.
- Review your current loan statement for APR, remaining balance, term length, and any prepayment penalties.
3. Gather Required Documents
Most lenders ask for:
- Loan payoff statement from your current lender
- Vehicle details (VIN, mileage, year/make/model)
- Proof of income (pay stubs, tax returns)
- Proof of address (utility bill, lease agreement)
- Photo ID (driver’s license or passport)
4. Shop & Compare Rates
Obtain quotes from at least three sources:
- Banks & Credit Unions (local branches or online)
- Online Aggregators like Bankrate’s Refinance Rates page
- Direct Lenders apply directly online
5. Crunch the Numbers
Evaluate each offer by its:
- APR—the true cost of borrowing.
- Term length—longer lowers payments but increases total interest.
- Fees—origination, application, or early-payoff charges.
- Total interest paid—use a refinance calculator, such as NerdWallet’s 6-step guide
6. Watch Out for Pitfalls
- Prepayment penalties on your old loan—factor these into savings.
- Rolling negative equity into your new loan can leave you upside-down.
- Extending the term too much may lower payments but cost more interest in the long run.
7. Submit Your Application
Once you choose a lender:
- Complete the application online or in-branch.
- Upload documentation.
- Receive conditional approval (often within 1–2 business days).
- Review and sign the new loan agreement.
8. Close & Pay Off the Old Loan
Your new lender typically pays off the existing loan directly. Confirm with both lenders that the old balance is settled and your title is in order.
9. Verify Your Savings & Consider Extras
- Compare old vs. new payment schedules to confirm your savings.
- Free up cash flow for other needs—consider pairing your lower payment with an extended warranty to protect against costly repairs over the new loan term.
For a deeper dive into auto-loan basics and refinancing tips, download CFPB’s step-by-step guide
10. Add an Extended Warranty
While doing your refinance, you can easily add an extended warranty at the same time. When you buy a warranty through a refinance, they are usually cheaper, and they can protect you from high repair bills.
Refinancing your auto loan doesn’t have to be daunting. By understanding your credit situation, comparing multiple offers, and doing the math carefully, you can drive off with a better rate, a shorter term—and more money in your pocket.
— Sandra McVey