How to Refinance a Car Loan: A Step-by-Step Guide

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Are you looking to get a lower interest rate and shrink the monthly payment on your car loan?

With the right game plan, refinancing your auto loan can help you accomplish both at the same time.

The term “refinance” can conjure thoughts of an overwhelming process, but refinancing your car is much less complicated than refinancing your home. There generally are no fees, and the loan itself can be processed much faster.

And the best part: You’re likely to see financial benefits from refinancing your auto almost immediately.

In this article, I provide a step-by-step guide to help you through the process of refinancing your vehicle from beginning to end.


Table of Contents


Step 0: Make Sure You Actually Need a New Auto Loan

So you’re ready for a new car loan. But are you sure that’s actually the right financial decision for you at this time?

Before you follow Team Clark’s steps to acquiring a new loan, you should assess whether you’re actually a good candidate for a refinance.

Clark Howard’s Simple Rule for Refinancing an Auto Loan

Refinancing an auto loan is so easy and straightforward that Clark says most people should at least explore the idea — especially if interest rates are low.

Here is Clark’s basic rule of thumb for determining if you’re a good candidate:

If you can qualify for an interest rate that is lower than the rate on your existing auto loan, you should move forward with refinancing — as long as you do not extend the term of your loan.

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And since you don’t have to pay any fees for a new auto loan, you’ll likely see monthly savings immediately. You can read more about Clark’s car refinancing philosophy here.

Should I Refinance My Car Loan? 4 Questions to Ask

If you’re considering a refinance but are unsure if you’re a good candidate, do this quick, four-question assessment.

  • What are the terms of my existing auto loan?
  • What is the current value of my vehicle?
  • Can I actually save money with a new loan?
  • Are my finances in the right spot to apply for a new loan?

Read more here about how the answers to these questions impact your decision on refinancing your car loan.


Step 1: Gather Your Documentation

Once you have decided that you would like to move forward with a car loan refinance, gather all your pertinent documents for the vehicle, your personal finances and the existing loan.

We’re starting here because we know that the application process for any new loan is going to require most, if not all, of this information.

Make sure you have copies of (or quick access to) the following:

  • Employment and income verification: Even though this is not a new car purchase, it is a new loan application. That means your new lender is going to want to verify your ability to make your payments.
  • Current loan balance: Potential new lenders will want this information when you’re requesting quotes on a refinance. Note that you may be required to bring money to closing on a new loan if your loan balance is higher than the current value of the vehicle.
  • Payoff letter: This is a letter from your existing lender that will have the balance — with interest calculated to the exact day of closing — for your new lender to send over. You may not be able to get this until you have an exact closing date, but you need to know who to contact to get it.
  • Copies of title and registration documents: The new lender will want to verify that the title is clean, your registration is current and that they will be able to get the title quickly from your existing lender.
  • Insurance documents: Some lenders will also want to verify that you have the proper level of insurance on the vehicle prior to writing a new loan for it.

Things You’ll Want to Research for Your Own Reference

Your potential new lender won’t necessarily require that you provide these items, but researching them yourself will keep you from being surprised during the refinancing process.

  • Credit score: This will be independently pulled by lenders, but you’re going to want to know where you stand going into things. Here are 5 ways to get your free credit score.
  • Book value of your vehicle: This one is for your reference only, as the new lender is likely to run these numbers using their own method. Still, getting a free quote from NADA or Kelley Blue Book should keep you from being caught off-guard by the valuation methods used.
  • Vehicle history: Just in case there are some discrepancies that could impact the value of your vehicle, you may want to use one of these 3 ways to get a free VIN report on your vehicle.

Step 2: Shop for Rates

Once you have all your documentation in order, it’s time to start shopping for the best terms on a new loan.

Clark recommends shopping at credit unions instead of banks for this type of loan. That’s because the rates are typically lower, and their appetites for taking on this type of loan are usually greater.

“Credit unions almost always are going to be the cheapest place,” Clark says. “Credit unions tend to use a sliding scale to find a loan for you. You have to really, really have horrendous credit for them to just flat turn you down.”

Clark also says that USAA is a good lending option for those who qualify for membership.

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3 Things to Keep in Mind While Shopping Rates

  • Know that advertised rates aren’t for everyone: Many lenders offer auto interest rates based on factors such as your credit score, amount of money borrowed, the book value of the auto, age of the vehicle and length of the loan you’re seeking. This means that any rate you see advertised should be considered as a “best-case scenario” from this lender. In order to know if you’ll actually qualify for that rate, you’ll need to contact the lender directly and likely will be required to provide some information so they can better assess the situation. More on this in Step 3.
  • Get a few different quotes: Clark says getting quotes from two or three different credit unions should be sufficient. If you’ve done your homework on who is offering the best rates online and in your area, you’re likely to have an actionable rate after just a couple of quotes.
  • Unfreeze your credit: Potential lenders will want to check your credit, so you’ll want to remember to unfreeze your credit before starting the quote process.

Step 3: Visit Lender and Potentially Apply for the Loan

As mentioned previously, expect an in-person or virtual meeting with your prospective lender to pinpoint your exact interest rate and complete the necessary paperwork.

You’ll want to be prepared for this application with the paperwork accumulated in Step 1 and the market knowledge you may have acquired during Step 2.

You’ll also want to have two forms of identification available (driver’s license, Social Security card, passport, etc.) and full information about your current and former addresses. You may also be required to show the vehicle to the lender, so ask whether you need to drive the car to the meeting.

Each lender’s evaluation process is a little different, but you can expect to see a rate chart similar to this one from Navy Federal Credit Union:

Navy Federal Credit Union has a full menu of car loan rates.
Rates data from Navy Federal Credit Union in January 2021

The interest rate offer that you’ll receive will be based on where you fall on the lender’s scale for things like creditworthiness, total amount of money borrowed, age of the vehicle and term of the new loan.


Step 4: Run the Numbers and Make a Decision

Once your potential new lender has evaluated the information you provide on the application, you will be either approved or rejected for a loan. If approved, you’re likely to be presented with your options for interest rate and loan term.

Instead of making a snap decision, step back from the table and do a quick assessment of the offer to make sure this loan is the right one for you.

Some things to consider at this point in time:

  • Are you actually saving money? Don’t rely solely on the monthly payment estimate they put in front of you. Remember Clark’s simple rule: Your goal is to lower the amount of money you pay AND decrease (or at least maintain) how much time it will take you to pay it off.
  • Will you need to bring money to the table? At this point, you should have a clear understanding of how much money the new lender says they’ll lend you for your vehicle. This is usually around 100% of the “book value,” but sometimes it can be more. If that does not cover your payoff balance, you’ll be required to bring money to the table. If that sum is more than you can afford, you should delay refinancing your car.

If you have a clear path to saving money without extending the length of the loan, and you’re not upside down on your existing loan, you should be ready to move forward with refinancing.


Step 5: Pay Off Existing Loan

Once you have decided to greenlight a new auto loan, things can happen pretty quickly.

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Usually, your new lender will walk you through this process, but here some things to expect.

  • You’ll need that payoff letter: Remember back in Step 1 when I said you’d need to be prepared for this? This is where the payoff letter comes into play. Basically, it’s a “to the exact date” calculation of what you owe your current lender. Your new lender will require this (or a suitable alternative document) so that they know exactly how much money is required to obtain the title to the vehicle.
  • Your new lender will pay your old lender for you: Once you finalize your paperwork on the new loan, the new lender will use the information in the payoff letter to send a check to your old lender to clear the balance and request the title.

Step 6: Set Up New Payoff Schedule

Congratulations! You have a new loan at a better interest rate and you’re well on your way to seeing savings right away.

There are just a few more things to consider about your new loan as you make the transition from one lender to the other:

  • Remember to change your monthly payment settings: If you had an auto-pay draft set up for your car loan, make sure you go into your bank account settings to stop those payments. And while you’re there, you can set up an auto-pay draft for your new loan.
  • Make sure you’re aware of your new due date: This is something you’ll likely talk over with your new lender during the loan application process, but you’ll want to make sure you’re on time for your first payment with the new loan. Sometimes you get to pick the day of the month that your car loan comes due, so be prepared to tell the new lender your preferred date.
  • Set a goal of paying the new loan off early: It wouldn’t be a good Clark.com article if I didn’t add some encouragement to pay the loan off early. Clark is not a fan of carrying auto debt, so the sooner you’re free of it, the better. You can reduce the balance of your loan by adding a little extra to your payment each month or maybe setting up a schedule for trying to “double pay” on your loan a couple of months each year. Before you know it, you will have shaved 6-12 monthly payments off your loan balance.

Final Thoughts

Refinancing your car loan is a fairly straightforward process that can save you money almost instantly.

As long as you’re following Clark’s rule, which is to make sure you’re both lowering your interest rate and shortening or maintaining your term on the loan, a refinance should prove to be a sound financial decision.

If you’re prepared with your paperwork and do your homework on rates, the whole car loan refinance process can be completed in a day or two.

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