How to Refinance an Auto Loan in 5 Steps

1. Consider if Refinancing Makes Sense for You

Before you start the application process, it's important to determine if refinancing is the right move for you. Here are some factors to consider:

• Current loan and vehicle: Take a look at your current loan terms, as well as your loan-to-value ratio, which is your loan's balance relative to the vehicle's value. If you have negative equity, meaning you owe more on the loan than the car is worth, it can be difficult to refinance. Also, keep in mind that some lenders may not work with you if your vehicle is 10 years old or older and has more than 125,000 miles.
• Credit requirements: To qualify for the best terms on the new loan, your credit score and history typically need to be in great shape. If you're not quite ready, consider waiting and improving your credit score first.
• Prepayment penalty: Some lenders will charge you a fee if you pay off your auto loan earlier than agreed. Check your loan terms to see if you have a prepayment penalty and how much it'll cost you compared with the potential savings you expect to get from the new loan.
• Origination fee: Some lenders may charge an upfront fee when you refinance. This origination fee can vary from lender to lender, but it's important to compare it with the potential savings to see if it's worth the hassle.
• Length of repayment period: If your new repayment term is longer than your current one and you don't necessarily need the lower payments, it may not be worth it simply because you may end up paying more in interest over the life of the loan.

2. Check Your Credit

There's no universal minimum credit score requirement for auto loans, but having good credit—meaning your FICO^® Score^☉ is 670 or higher—can improve your chances of securing favorable terms.

In any case, your credit score should ideally be better now than it was when you received your first auto loan on the car. Check your credit score to see where you stand and if it might make sense to wait and continue making improvements before you apply.

If your credit does need some work, go over your credit reports to get ideas of where you can focus your efforts. You can get your credit report from all three bureaus for free through AnnualCreditReport.com. Your Experian credit report and FICO^® Score are also available for free directly through Experian.

Learn more: How to Improve Your Credit

3. Gather Documents for Your Loan Application

After you submit your application, you'll typically be required to provide some documents to your new lender. Having this information before you even start the loan process will help it go more smoothly.

Documents that you may be required to share include:

• Copy of your driver's license
• Proof of insurance
• Proof of income
• Proof of residence
• 10-day payoff statement

You'll also typically need to provide the vehicle identification number (VIN) so the lender can determine the car's value.

4. Compare Offers

The best way to maximize your savings is to shop around and compare offers from multiple lenders. It's best to check offers from different types of lenders, including banks, credit unions and online-only lenders.

While there are some differences between these financial institutions, it's ultimately best to pick a lender based on the terms they offer. As you compare offers, pay attention to the following features:

• Interest rate
• Repayment terms
• Fees and penalties
• Monthly payment

Getting preapproved for an auto loan typically involves a hard credit check. However, if you do submit multiple auto loan applications in a short period, try to submit all applications within 45 days. Newer FICO scoring models will generally combine inquiries within this period into one for purposes of calculating your credit score.

Learn more: How to Get the Best Car Loan

5. Apply for a New Auto Loan

Once you've narrowed down your list of offers to one, submit an application with that lender. Depending on the financial institution, you may be able to do it online, over the phone or in person.

You'll generally need to provide the same information you shared when you applied for your existing auto loan. Once you've submitted your application, the lender will go through the underwriting process to determine whether you qualify and what your loan terms will be.

Carefully read the fine print to make sure you understand the terms and other details. If you agree and sign the contract, the lender will pay off your existing loan. The contract will let you know when you'll need to start making payments on the new loan.

Be sure to manage this transition to the new loan carefully to avoid missing payments. Pay attention to all communication from both your old lender and your new one to make sure everything is buttoned up.

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Frequently Asked Questions

Continue to Monitor Your Credit

After you've been approved to refinance your auto loan, it's still important to keep track of your credit and make adjustments as needed. That way, you'll be ready the next time you need to borrow money.

Experian's free credit monitoring tool makes it easy to stay on the right track. You'll get access to your FICO^® Score powered by Experian data and your Experian credit report. You'll also get real-time alerts whenever your credit report updates with new inquiries, accounts and personal information.

With your pulse on your credit score, you'll be in a better position to address issues as they arise to maintain good credit.