How To Refinance Your Car Loan

Taking out a loan to buy a car is a major financial step. But what if your financial situation changes for the better after you've driven off the lot? Maybe your credit score has improved, or interest rates have dropped. You might be paying more than you need to. This is where refinancing your car loan can be a powerful financial move.

Refinancing sounds complex, but it's simply the process of replacing your existing car loan with a new one. The new loan pays off the old one, and you start making payments to a new lender, hopefully with better terms. In this guide, we'll walk you through the steps to refinance your car, help you decide if it's the right choice for you, and explain the timing involved. There is also a loan comparison calculator below to see how a difference refinancing could make.

Steps to Refinance Your Car Loan

Think of refinancing as applying for a new loan. The process is straightforward and can be broken down into a few simple steps.

1. Check Your Credit Score

Your credit score is the most important factor lenders consider. A higher score shows you're a responsible borrower, which often qualifies you for a lower interest rate. Before you do anything else, check your credit score. You can get a free report from the major credit bureaus. If your score has gone up significantly since you first got your loan, you’re in a great position to refinance.

2. Gather Your Documents

Lenders will need specific information to process your application. Having these documents ready will make the process much smoother. You’ll typically need:

Personal Information: Your driver's license, Social Security number, and proof of residence.

Proof of Income: Recent pay stubs, W-2s, or tax returns to show you have a steady income.

Vehicle Information: Your car's make, model, year, vehicle identification number (VIN), and current mileage.

Current Loan Details: The name of your current lender and your loan account number. You can find this on your monthly statement. It's also helpful to get a "payoff amount" from your lender, which is the total you need to pay to close the loan.

3. Shop Around for the Best Rates

Don't accept the first offer you receive. Different lenders offer different rates and terms. Get quotes from several financial institutions, including banks, online lenders, and especially credit unions like SCU Credit Union. Credit unions are member-owned and often provide more competitive rates and personalized service than larger banks.

When comparing offers, look at the annual percentage rate (APR), the loan term (how many months you'll be paying), and any associated fees.

4. Submit Your Application

Once you've chosen a lender that offers you the best deal, it's time to formally apply. You can usually do this online, over the phone, or in person. Since you've already gathered your documents, this step should be quick and easy. The lender will review your application and, if approved, will present you with a final loan offer.

5. Finalize the New Loan

If you accept the offer, the new lender will take care of the rest. They will pay off your old loan directly with your previous lender. From that point on, you will start making your monthly payments to your new lender. Be sure to confirm with your old lender that the account is paid in full and closed.

Is Refinancing Your Car Worth It?

Refinancing isn't the right move for everyone. The goal is to improve your financial situation. Here’s how to determine if it’s worth it for you.

When It Makes Sense to Refinance

Your Credit Score Has Improved: Did you have a low credit score when you bought your car? If you've been making payments on time and managing your other debts well, your score has likely gone up. A higher score can unlock a much lower interest rate, saving you hundreds or even thousands of dollars over the life of the loan.

Interest Rates Have Dropped: The economy changes, and so do interest rates. If overall rates have fallen since you took out your loan, you may be able to refinance at a lower rate, even if your credit score hasn't changed.

You Want to Lower Your Monthly Payment: If your budget is tight, refinancing can provide some relief. By extending your loan term (for example, from 36 months to 60 months), you can significantly lower your monthly payment. Keep in mind that while this helps your cash flow now, you may pay more in total interest over the longer term.

You Got a Bad Deal the First Time: Sometimes, dealer financing isn't the most competitive. If you took the first offer you got out of convenience, there's a good chance a better rate is available elsewhere.

When It Might Not Be a Good Idea

Your Current Loan Has Prepayment Penalties: Some lenders charge a fee if you pay off your loan early. Check your loan agreement. If the penalty is high, it might cancel out any savings from refinancing.

You're "Upside Down" on Your Loan: Being "upside down" or having "negative equity" means you owe more on your car than it's currently worth. Many lenders won't refinance a loan in this situation.

Your Car is Old or Has High Mileage: Lenders have restrictions on the age and mileage of the vehicles they're willing to refinance. If your car is too old or has too many miles, you may not qualify.

You're Near the End of Your Loan Term: If you only have a year or two left on your loan, most of your payments are going toward the principal. The potential interest savings from refinancing might be minimal and not worth the effort.

Can I Refinance My Car Right Away?

This is a common question, and the answer is generally yes. Most lenders don't have a specific waiting period before you can refinance.

Take the Next Step with SCU Credit Union

Refinancing your car loan can be a smart way to lower your interest rate, reduce your monthly payment, and save money. By understanding the process and evaluating your personal financial situation, you can make an informed decision that works for you.

Are you ready to see if you could get a better deal on your auto loan? At SCU Credit Union, we're dedicated to helping our members achieve their financial goals. We offer competitive rates and a simple, straightforward refinancing process.

Explore your auto refinancing options with SCU Credit Union today and see how much you could save!  Questions? Stop by one of our branches or call 877-661-3300