What does it mean to refinance a car?

Quick insights

• Refinancing your car could potentially help you save you money by lowering your monthly car payment and it can decrease the amount of interest you pay if you are approved for a lower interest rate.
• You can put the money you may save from refinancing a car loan towards savings, home improvements or paying off credit card debt.
• It’s important to consider the potential risks that may come with refinancing a car.

Refinancing your car means applying for a new auto loan that would replace your existing one. If approved, the new loan pays off your original loan, and you begin making monthly payments on the new loan. The application process for refinancing generally doesn't take much time, and many lenders can make determinations quickly. Still, there are things you may want to consider before taking the plunge.

Already familiar with auto refinancing? See how refinancing with Chase Auto could help you.

How to refinance a car loan in five steps

 The process may vary slightly according to the lender but knowing some basic steps can help prepare you for what comes next.

1. Decide if refinancing makes sense for you

Refinancing your auto loan  could  lower your monthly car payment, help pay off your car faster if you choose a shorter loan term or lower your interest rate. However,  refinancing might not be possible if any of the following factors apply to you:

• You're behind on your payments: Any late payments on your existing loan or other credit problems could eliminate the possibility of qualifying for a loan that could have better terms.
• Your current loan has a prepayment penalty: A prepayment penalty is a fee for paying your loan off early and could cancel out any potential refinancing savings.
• You owe more than your car is worth: Securing favorable loan terms could prove problematic if the balance on your loan is greater than the value of your vehicle.
• You have an old vehicle: Some lenders won't refinance older or high mileage vehicles, so it could prove more beneficial long term to upgrade your car.

2. Check your credit

Lenders rely heavily on your credit report and credit score when approving a loan and determining an interest rate. A higher credit score typically translates into lower interest rates. Keep an eye on your credit, as it may have changed over time.

3. Gather relevant documents

Organizing your documents ahead of time can help simplify the application process. Most of the time, you'll need the same items used for securing a loan, including:

• Your driver's license
• Pay stubs or other proof of income
• Your Social Security number

You may also need to obtain a payoff quote from your current lender once your refinance application is approved. A new lender might request details about your existing loan, such as:

• Your remaining balance
• Your current monthly payment
• Vehicle information, like the vehicle identification number (VIN)
• The amount of time left on your loan
• The interest rate you're paying

Chase Auto will attempt to collect this information on your behalf during the refinance application process to help streamline the application experience.

4. Ask the right questions

Before signing on the dotted line, cover your bases by asking questions and reading the fine print. Talk to lenders and ask, “how does refinancing a car work?” Also, get answers regarding the expected annual percentage rate (APR), loan duration and if there are any origination fees or early payoff penalties.

5. Apply for refinancing

If you've found the right deal and are confident about your ability to qualify, you might be ready to jump right in and start the refinance application process. Just know that it can trigger a hard credit check on your credit report.

When should you consider refinancing your car?

Refinancing a car isn't for everyone and deciding when to refinance can be challenging. The benefits of refinancing might be limited or non-existent in certain instances. For example, if you have a poor payment history on your current loan or are close to paying it off, it may not be to your advantage to refinance.

However, there are times when refinancing your car can benefit you. You may want to consider refinancing your car if any of the following situations apply to you.

Your credit score increased

Your credit score is one of the main factors a lender considers when determining loan approval and credit terms. If you financed your car with a low credit score, refinancing your car could get you a better interest rate or even reduce your monthly payment.

Interest rates have dropped

If you bought your car when interest rates were high, refinancing your vehicle can save you money, possibly more than you realize. An interest rate decrease of only 2% to 3% could save you hundreds if you do not extend the term of your loan. An auto loan calculator can show you how interest rates affect your monthly payment and the total amount you could pay in interest over the life of the loan.

You didn’t shop around for rates initially

If you got your original loan from the car dealer, you might have spent too much. Buyers don't always check their credit score or research interest rates before heading to the dealership, and their loan terms may have suffered because of it. If you took the loan offer from the dealership without knowing what options were available, you might not have received the best deal.

Your monthly payment is too high

If your monthly payment is too high, refinancing your car could help. A lower interest rate can decrease your monthly payment, but it may not be enough to make the difference you need. Extending the length of your loan can have a greater impact on reducing your monthly installment. However, a longer term increases the amount of interest you'll pay over the life of the loan, assuming no change to your interest rate.

In summary

Refinancing your car could save you money by lowering your monthly payments or reducing the total interest paid, allowing you to allocate funds to other financial goals. It’s important to consider factors such as your credit score, current interest rates, and the condition of your vehicle before deciding to refinance.