A record 107 million Americans have auto loan debt, and it’s no wonder. For many people, a car is a necessity to commute to work or pick up their kids from school.
But if your credit score was low when you bought your car, your loan’s interest rate can be sky-high. In fact, interest rates for subprime loans — that is, loans for those with a spotty credit history — can be upwards of 30%.
You could end up paying thousands more than the car’s worth thanks to interest. However, if you have a steady job and have improved your credit since you bought your car, you could improve your situation.
If you decide to refinance an auto loan, you could save thousands over the length of your loan, pay off your debt faster, or reduce your payments. Here’s how it works.
How refinancing a car works
When you refinance a car loan, you work with a different lender to take out a new loan for the amount you owe on the car.
The new lender often offers completely different loan terms, possibly including a different interest rate, repayment term, or monthly payment. If your goal is to become debt-free, refinancing can help you pay off your car loan more quickly.
For example, if you bought a car using a $15,000 loan at 10% interest and took five years to repay it, you would pay back $19,122 in total. However, if you refinanced that same loan at 5% interest, you’d pay just $16,984. That’s over $2,000 in savings that you could use for your other financial goals.
When to refinance an auto loan
If you’re trying to decide if refinancing a car is a good idea, here are four situations when it can be a wise decision:
- When your credit score improves: If you bought a car straight out of school, when you had an entry-level salary and a low credit score, you likely took out a high-interest loan. But if your income and credit score has improved since then, you could refinance an auto loan at a much more competitive rate.
- When interest rates decrease: Car loan interest rates fluctuate along with the market. For example, in July 2017, auto loan interest rates hit a six-month low, reported Edmunds. If you bought a car when rates were higher, you can take advantage of the new loans by refinancing.
- If you were taken advantage of: Going into a car dealership can be overwhelming, and it’s easy for a high-pressure salesman to get you to spend more than you can afford. If you signed a bad deal on a car, you could refinance a car loan and reduce the interest you pay.
- You need a lower payment: If you can’t afford your current monthly payments or want to give yourself more breathing room, refinancing your car loan can allow you to extend your repayment period and get a lower payment. You’ll likely pay more in interest over time with this method, but you can get much-needed relief right now.
When you shouldn’t refinance an auto loan
While refinancing is a smart option for some, it probably isn’t a good idea if you have one of the following issues:
- You’re upside down on a loan: If you owe more than the car is worth, finding a lender willing to work with you could be difficult. If you do find a company who will give you a loan, it will likely be for a shorter repayment term and have higher monthly payments.
- Your car is older: If you have an older vehicle, getting a refinancing loan can be hard, as well. Some banks will not refinance loans on cars that are more than seven to 10 years old.
- Your balance is too low: Most banks have a minimum loan balance. If you owe less than $7,500, you might be ineligible for refinancing with some lenders.
How to get an auto refinance loan
If you’ve decided to refinance a car loan, you can take out a new loan in just six steps:
1. Check your credit
Before shopping around, make sure you check your credit report and your credit score. By knowing that information ahead of time, you’ll have a better idea about what kinds of interest rates you can receive.
2. Check out banks and credit unions
Many banks and credit unions offer auto loan refinancing. In addition, several of them allow you to get quotes on a refinancing loan without doing a hard credit pull, so there’s no impact on your credit.
Banks that offer car loan refinancing include:
- Bank of America
- Capital One
- Navy Federal Credit Union
- Wells Fargo
3. Compare offers
Shop around and get quotes from three to five different banks or credit unions to get the best deal. Sometimes, the interest rate can vary as much as 1% to 2%. By looking at different loan options, you can find the loan term and interest rate that works for you.
4. Provide documentation
When you find an offer you’re happy with, make sure you have the required documentation on hand. Each lender will have their own requirements, but generally, you should collect the following:
- Name, address, and Social Security number
- Employer information
- U.S. citizenship status
- Purchase agreement of the bill of sale from when you bought the car
- Car registration
- Car title, or previous loan agreement
- Lease buyout information
- Proof of income, such as a W-2
- Federal tax returns
- Vehicle Identification Number (VIN)
5. Submit an application
Some banks allow you to submit the loan application online, but others require you to come into a branch and fill out the application in person. In many cases, you will find out if the bank approved you within 24 hours.
6. Manage your new loan
Most banks will work with your old lender to pay off the original loan on your behalf. That process can take two to three weeks before the loan goes through, so it’s important to make any payments that are due in the meantime. Once it’s complete, your new lender will notify you about your account and how to start making payments.
Speeding up repayment of your auto loan
A high-interest loan is sometimes a harsh reality. When you need a vehicle to get to work and you have bad credit, you might be forced to take whatever loan and interest rate you can get.
But as your situation improves, you can correct those issues by refinancing your loans and getting better terms.
If you’re looking for other ways to cut your transportation costs, shopping around for new car insurance each year can help you save hundreds.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for SoFi.
2 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.54% APR (with Auto Pay) to 7.27% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of March 18, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 0318/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.5% effective February 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.54% – 7.12%3||Undergrad & Graduate|
|2.54% – 7.27%1||Undergrad & Graduate|
|2.67% – 8.96%4||Undergrad & Graduate|
|3.23% – 6.65%2||Undergrad & Graduate|
|2.69% – 7.43%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|