How Auto Loan Refinancing Works: A Complete Guide for Beginners

Last Updated on November 17, 2020

This page provides detailed information on how auto loan refinancing works. Here you will learn what refinancing is, how refinancing works, types of refinancing, the benefits of refinancing, and all other important auto loan refinancing information that you might need. Keep for updates.

What Is Refinancing?

Refinancing involves the process of reviewing and replacing the terms of an existing credit agreement, usually with respect to a loan or mortgage.

When a business or individual decides to refinance a credit obligation, they are effectively seeking to make favorable changes to their interest rate, payment schedule, and / or other terms set out in their contract. If approved, the borrower gets a new contract that replaces the original agreement.

Borrowers often choose to refinance when the terms of interest rates change significantly, causing potential savings on debt repayments under the new arrangement.

How Refinancing Works?

Consumers typically seek to refinance certain debts in order to obtain more favorable borrowing terms, often in response to changing economic conditions. The common goals of refinancing are to lower its fixed interest rate to reduce payments over the life of the loan, change the term of the loan, or move from a fixed rate mortgage to an adjustable rate mortgage (ARM) or vice versa.

Borrowers can also refinance because their credit profile has improved, due to changes in their long-term financial plans, or to pay off existing debts by consolidating them into one loan at a low cost.

The most common motivation for refinancing is the interest rate environment. As interest rates are cyclical, many consumers choose to refinance when rates fall. National monetary policy, the economic cycle, and market competition can be key factors that raise or lower interest rates for consumers and businesses.

These factors can influence interest rates across all types of credit products, including both non-revolving loans and revolving credit cards. In a rising-rate environment, debtors with variable-interest-rate products end up paying more in interest; the reverse is true in a falling-rate environment.

In order to refinance, a borrower must approach either their existing lender or a new one with the request and complete a new loan application. Refinancing subsequently involves re-evaluating an individual’s or a business’ credit terms and financial situation. Consumer loans typically considered for refinancing include mortgage loans, car loans, and student loans.

Businesses may also seek to refinance mortgage loans on commercial properties. Many business investors will evaluate their corporate balance sheets for business loans issued by creditors that could benefit from lower market rates or an improved credit profile.

Types of Refinancing

There exist several types of refinancing options. The type of loan that a borrower decides to get depends on the needs of the borrower. Some of these refinancing options include:

1. Rate-and-term refinancing

The most common type of refinancing. Rate-and-term refinancing occurs when the original loan is paid and replaced with a new loan agreement that requires lower interest payments.

2. Cash-out refinancing

Cash-out refinancing are common when the underlying asset used as collateral has increased in value. A transaction involves the withdrawal of value or equity in an asset in exchange for a higher loan amount and often a higher interest rate. In other words, when an asset increases in value on paper, you can access that value through a loan rather than selling it. This option increases the total loan amount but gives the borrower immediate access to funds while retaining ownership of the asset.

3. Cash-in refinancing

A cash-in refinance allows the borrower to pay down some portion of the loan for a lower loan-to-value (LTV) ratio or smaller loan payments.

4. Consolidation refinancing

In some cases, a consolidation loan may be an effective way to refinance. A consolidation refinancing can be used when an investor obtains a single loan at a rate that is lower than their current average interest rate across several credit products. This type of refinancing requires the consumer or business to apply for a new loan at a lower rate and then pay off existing debt with the new loan, leaving their total outstanding principal with substantially lower interest rate payments.

Understanding Auto Loan Refinancing

Auto refinancing is when you pay off your existing car loan and replace it with a new one, usually from a different lender. Refinancing your auto loan could help you save money by securing a lower interest rate. Or you can reduce your monthly payments by adjusting the length of your loan term, freeing up cash for other financial needs.

How Does Refinancing a Car Work?

Refinancing your car is a lot like refinancing your house; you get a new car loan to replace the one you have. Here are the factors to consider for success:

  • Make sure your credit is strong: Get your credit report, which is free once a year, and check for mistakes that may lower your credit score. If there are any, get them fixed. Look for items you can pay down or off, especially anything in collections. Check your credit score, which is what most lenders use to determine how likely you are to repay your debts. It’s based on the information on your credit report like payment history, credit history length, debt levels, and types of credit history.
  • Estimate your car’s loan-to-value (LTV) ratio: Unlike homes that can appreciate in value, cars depreciate in value over time. But like a house, you’ll need equity in your car to refinance. To start, you’ll need to determine your auto’s value and whether you’re “upside down” in your loan—meaning what you owe is more than the car’s actual worth. You can research your car’s current value on sites like Kelly Blue Book or NADA Blue Book before beginning the refinancing process.
  • Shop around for the best loans: It is very important to find the best loan so that you get the interest rates and repayment terms that are right for you. You can easily do this online using your favorite search engine to compare offers. Without doing research, you can overpay the loan. Look for the shortest loan term at the maximum monthly payment you can make. Remember, as with home refinancing, a refinanced car loan will restart the hours on your loan. Read the fine print on each offer to make sure it works for you.
  • Get your paperwork together: Besides proving your identity, lenders want to know you can pay your new auto loan back. So know what documents lenders want for the car loan refinancing process and set them aside. To be sure you have everything you need, contact lenders you’re considering and ask them what paperwork they require.

Qualifying For an Auto Loan Refinance

To be eligible for an auto loan refinance, you will need a solid credit history. Your credit history will have a direct impact on the interest rate you are offered. If you’ve made six to twelve months of regular, on-time payments on your current loan, it’s likely your credit score has improved. With a better credit score, you will likely qualify for a lower interest rate when you refinance.

When Is the Best Time to Refinance Car Loans?

It is best to refinance a car loan when one of three situations occurs:

1. When your credit score has improved

Improvement in your credit score since you purchased your vehicle may mean it’s time to refinance. The higher your credit score, generally, the lower your interest rate for your auto loan and the better terms you’ll get for your car refinancing.

You could get a lower interest rate and have more of your monthly payment going to principal and not interest if you do. Over the life of your loan, refinancing to a lower interest rate may save you hundreds or thousands of dollars in payments. Use a car refinance calculator to determine how much you could save over your car loan’s new term if you refinance.

2. When you need to reduce your monthly payments

If the amount of your monthly auto payment feels burdensome, you might reduce it by refinancing. When you refinance, you may be able to extend your repayment term, which may lead to lower monthly payments. That could mean more income to put toward other monthly expenses. Run your numbers with a car refinance calculator to see how much monthly savings you’ll see.

Even if those numbers look good, make sure you’re not refinancing into a loan with a higher interest rate or less favorable repayment terms and conditions. Research the process and true costs of refinancing carefully. When you think you’ve found the right loan, ask clarifying questions of your lender about how refinancing a car works until you’re sure you understand your new loan before accepting.

3. When interest rates drop

If you finance your vehicle through your dealer, you may not have received the best interest rate. Start looking for better deals, identify one and refinance your car loan—especially if you see interest rates dropping. The best place to look may be a financial institution where you already have a relationship. If they don’t offer auto refinancing at all or at lower rates than what you already have, your next best bet may be your local credit union.

Credit unions usually offer lower cost loans even if you have a low credit score. If you’re not a member of a credit union, you would need to join to get the best rates. But the cost of membership is usually low and the process worthwhile if you can get a good deal by becoming a member.

Best Auto Refinance Loans

As with any business, some companies gain a reputation for being a place to go for a certain product, and this is the case with auto loan refinancing. To create this list of the Best Auto Refinance Loans, we looked at auto loan products from 15 lenders and compared the key factors including APRs, minimum loan amounts, repayment terms, credit score requirements, and more.

OpenRoad Lending: Best Refinance Rates

OpenRoad Lending specializes in auto refinancing, offering traditional and cash-back refinancing options and a wide range of loan terms. Borrowers with excellent credit can refinance into some of the lowest rates available. In addition, it provides financing options for individuals across the credit spectrum.

Key Information

  • APR: As low as 1.99%
  • Minimum loan amount: $7,500 in most states
  • Repayment terms: Up to 72 months
  • Recommended credit score: Not disclosed
  • Availability: Nationwide

Founded in 2009, OpenRoad Lending specializes in auto refinance loans and offers a range of car-related financial products. Rates for refinancing start as low as 1.99% for terms of up to 24 months. OpenRoad Lending says that on average its customers save 5.6% off of their existing APR.

Its traditional refinance product is open to borrowers of all credit ratings. There’s also a cash-back refinancing option, which allows borrowers to get up to $5,000 cash back by refinancing their existing loan.

In order to refinance with OpenRoad Lending, you must be financing a minimum of $7,500 and a maximum of $100,000 for a vehicle that is eight model years old or newer. The vehicle must also have less than 140,000 miles.

Borrowers need a gross monthly income of at least $1,500 and can’t be self-employed. OpenRoad won’t refinance vehicles that are no longer being manufactured, commercial vehicles, recreational vehicles, or motorcycles. You can apply for a loan through OpenRoad Lending via its online application or over the phone.

RoadLoans: Best Auto Refinance for Bad Credit

Minimal credit requirements and flexible loan amounts make RoadLoans a worthwhile option for borrowers with less-than-perfect credit. It also offers a quick online application and approval process—it takes anywhere from 24 to 48 hours for your application to be approved or denied.

Key Information

  • APR range: Not disclosed
  • Minimum loan amount: $5,000
  • Repayment terms: Up to 72 months
  • Recommended credit score: No credit requirements
  • Availability: Not available in Alaska, Hawaii, New Hampshire, Mississippi, and Nevada

RoadLoans is a direct-to-consumer online lender based in Dallas and owned and operated by Santander Consumer USA. Its traditional and cash-back refinance loans have no credit requirements. The minimum loan amount is $5,000, while the maximum is $75,000, and loans are available in most states.

Because of its lack of credit requirements, RoadLoans offers borrowers with poor credit the chance to refinance a car loan with little hassle. Indeed, those looking to refinance can get approved for a loan within 24 to 48 hours after submitting an application.

RoadLoans doesn’t publish rates on its site, but rates are generally higher on loans that go to borrowers with bad credit. The tradeoff is that RoadLoans removes credit as a barrier to refinancing, making it a solid option for poor-credit borrowers who might not be able to get a loan elsewhere.

Bank of America: Best Bank for Auto Refinance

Among big banks, Bank of America offers competitive refinance rates and an easy overall process. It’s open to borrowers throughout the nation and it gets better-than-average scores in J.D. Power’s 2020 U.S. Consumer Lending Satisfaction Survey.1

Key Information

  • APR range: As low as 3.69% APR
  • Minimum loan amount: $7,500 for purchase ($8,000 in Minnesota)
  • Repayment terms: 12 to 75 months
  • Recommended credit score: Not disclosed
  • Availability: All 50 states

Bank of America (BofA) offers a number of car loan refinance options. Borrowers can refinance any existing auto loan, whether the original loan is through BofA or another institution. Its rates for refinances start at 3.69%. Preferred Rewards customers of the bank can get up to a 0.5% discount on their rate.

The main disadvantage to getting an auto loan through Bank of America is its restrictions on which vehicles it will finance. It won’t provide loans for vehicles over 10 years old, for vehicles with 125,000 miles or more, or for vehicles worth less than $6,000. It also won’t provide a loan amount of less than $7,500 ($8,000 in Minnesota).

Those interested in refinancing through BofA can start the application process online. Bank of America says the application takes about 60 seconds. Once approved, payment is sent directly to the loan holder. Its online application allows for 48-, 60-, and 72-month terms, but it has more options if you apply in a branch or over the phone.

PenFed Credit Union: Best Credit Union for Auto Refinance

Members of PenFed get access to very competitive refinance rates. There’s a convenient online application for refinances, and borrowers can finance up to 100% of their vehicle.

Key Information

  • APR range: As low as 2.14% APR
  • Minimum loan amount: $500
  • Repayment terms: 36 to 84 months
  • Recommended credit score: Not disclosed
  • Availability: All 50 states

For members of the credit union, PenFed provides a wide range of loan terms and very competitive rates. Refinance rates for 2019 and 2020 model years start as low as 2.14% for a 36-month loan for loan amounts ranging from $500 to $100,000. Rates start as 2.99% for vehicles with a model year of 2018 or earlier.

Rates and minimum loan amounts at PenFed increase as the refinancing term increases. For example, an 84-month refinance loan with a model year of 2019 or 2020 comes with a rate starting at 4.49%, up from 2.14% on a 36-month loan. As with most lenders, borrowers need excellent credit in order to get the lowest rates.

Remember that membership in the credit union is required in order to refinance an auto loan. Membership is open to current and former military and their families. Those with no military affiliation can join by making a one-time donation to the National Military Family Association or a $15 donation to Voices for America’s Troops. You also need to open a savings/share account with at least $5

LightStream: Best Online Refinance Loan

LightStream offers competitive rates, a wide range of refinance options, and an entirely online process for refinancing. It also gets strong customer service ratings, receiving a top score in the J.D. Power 2020 Customer Lending Satisfaction Survey.2

Key Information

  • APR range: As low as 2.49% with autopay (Rates as of 10/5/2020)
  • Minimum loan amount: $5,000
  • Repayment terms: 24 to 84 months
  • Recommended credit score: Not disclosed
  • Availability: All 50 states

LightStream, the online lending arm of SunTrust Bank, offers a completely online lending process. Borrowers can receive a direct deposit as soon as the same day. For those with excellent credit, LightStream offers some of the most competitive refinance rates available with a wide range of loan terms. There are also no major restrictions on the type of vehicle you can refinance.

Rates from LightStream start as low as 2.49% on 24- to 36-month loans of $10,000 to $24,999. That’s with its autopay option. If you don’t opt for autopay, LighStream’s quoted rates increase by 0.50% points. You can finance loan amounts as low as $5,000 or as high as $100,000. Loans can’t be used to finance an existing LightStream loan.

Remember that LightStream requires a “hard pull” on your credit upfront. Hard credit pulls can slightly lower your credit score. Some lenders only require a soft pull on your credit.

Frequently Asked Questions about Auto Loan Refinance

Can I refinance my car loan with bad credit?

It can be difficult to refinance a car loan if you have a bad credit history, but it is still possible. If you’ve paid for your car regularly and on time for six to 12 months -even if your score hasn’t improved yet a lender might work with you. Apply to multiple lenders because each has different credit score requirements. Your bank or credit union may also be more open to do business with you because you already have a relationship with them.

Which is the best lender to refinance with?

The higher your credit scores and the stronger your finances, the more choices you’ll have. Apply to multiple lenders to see what new interest rate you can qualify for. Comparing several offers gives you the best chance of finding the lowest rate.

Keep in mind that rate shopping can also lead to being contacted by multiple lenders, especially if you use a service that compares offers for you. Consider opening a new email account and getting a free Google Voice phone number that you can check separately.

Most lenders use what is known as a soft credit check that gives you a rate estimate but does not hurt your credit score. If you apply to more than one lender that requires a full application and hard credit check, credit scoring formulas tend to treat multiple inquiries in a short time period as a single event. For most FICO formulas, for example, that period is 45 days.

What happens if I extend my loan term?

Extending the length of your loan when you refinance will lower your monthly payments. However, you likely won’t save money because you’ll pay more in interest over the life of your loan.

Extending your term could also put you at risk of becoming upside-down on your loan, meaning you owe more than your car is worth. This is a risky situation to be in. If you get in an accident, and your car is totaled, your insurance might not cover what you owe. Also, if you have to sell your car, you’d still owe money on the loan.

What documents will I need to refinance my auto loan?

During the application process, you may be asked to provide your driver’s license, vehicle registration and proof of insurance. You may also be asked to provide additional documentation to prove your income or other information, if necessary.


Knowing how to refinance your car the right way is the key to getting into a better loan. Do your research, seek out a lender and loan terms that meet your needs and help improve your overall financial picture. 

Sometimes the best option for car loan refinancing may not be a car loan at all. A home equity loan can also be used to finance a car. Since this is a secured loan using the collateral in your home, the interest rate can probably be lower than a personal loan or even dealer financing, but the term can be much longer than refinancing a car loan or personal loan, so you may pay more interest. Be sure to check all the details of the loan terms.

We hope you will find this information useful. Do you have any queries on how auto loan refinancing works? Please feel free to let us know so we can assist you with any information you will need.

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