Learn all about auto loan refinancing and how it can help you lower your interest rate, reduce monthly payments, and pay off your loan sooner. Discover the requirements, tips and best practices for a successful auto loan refinance process. Get all the information you need to make an informed decision on whether auto loan refinancing is right for you.

Summary

• Refinancing a car loan involves replacing your current loan with a new one to lower your interest rate, reduce monthly payments, or pay off the loan sooner.
• The requirements for refinancing are similar to those for getting a car loan initially. Lenders will consider your credit and vehicle information, such as mileage, but may have time requirements for when you can refinance.
• The recency of your current loan is an important factor for some lenders when considering refinancing. Some lenders may only refinance a car loan that has been open for at least six months.
• The remaining time and balance of your loan are also important factors for lenders when considering refinancing. Most auto loans use simple interest, which means that you pay more interest at the beginning of the loan.
• When refinancing an auto loan, lenders typically have specific requirements for the vehicle such as mileage and age, loan-to-value ratio, and type of car and its history.
• When refinancing an auto loan, lenders take into consideration many of the same credit factors as they would with any other auto loan, including your credit score, which is an important factor, and most lenders have minimum credit score requirements for auto loans, usually within the 500s range on the FICO credit scoring model.
• Research each lender’s specific requirements to ensure you meet the requirements before applying to multiple lenders.
• Most lenders will not refinance their own auto loans and many lenders will not refinance a car loan with less than $5,000 remaining on the loan balance.
• Cars with branded titles, which indicate some type of damage or defect in the car’s past, often fall on a lender’s restricted list and some lenders may have restrictions on the make, model, and type of vehicles they will refinance.

What is Auto Loan Refinancing?

Refinancing a car loan involves replacing your current loan with a new one to lower your interest rate, reduce monthly payments, or pay off the loan sooner. The requirements for refinancing are similar to those for getting a car loan initially. Lenders will consider your credit and vehicle information, such as mileage, but may have time requirements for when you can refinance. Additionally, most lenders will not refinance their own auto loans. Research each lender’s specific requirements to ensure you meet the requirements before applying to multiple lenders.

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Requirements for Refinancing an Auto Loan

The Recency of Your Current Loan

The recency of your current loan is an important factor for some lenders when considering refinancing. Some lenders may only refinance a car loan that has been open for at least six months. Others do not have a set waiting period, but they require that the car’s title is in the possession of the current lender. This is because the refinance lender will need to obtain the title to finalize the new loan. Even if a lender has no waiting period, the process of obtaining the title can take several months, making the overall refinancing process take anywhere from two to three months.

Remaining Time and Balance of Your Loan

The remaining time and balance of your loan are also important factors for lenders when considering refinancing. Most auto loans use simple interest, which means that you pay more interest at the beginning of the loan. If you have less than two years remaining on a loan or a balance of only a few thousand dollars, it may not be worth it for you to refinance as you may not save enough, or the lender may not earn enough to make it worthwhile. Most lenders have a minimum loan amount for refinancing which varies by lender. Many lenders will not refinance a car loan with less than $5,000 remaining on the loan balance. Additionally, some lenders require borrowers to have at least 24 months remaining on the car loan in order to refinance.

Vehicle Requirements for Refinancing an Auto Loan

When refinancing an auto loan, lenders typically have specific requirements for the vehicle. These requirements are similar to those for used car purchase loans.

Car mileage and age are usually considered, with most lenders having maximum mileage and age requirements for cars they will refinance. These maximums vary by lender, but they often fall within the range of 125,000 to 150,000 miles and 10 model years or newer.

Lenders also look at the loan-to-value ratio, which is the total amount of the loan divided by the vehicle’s actual cash value, expressed as a percentage. A maximum loan-to-value ratio is set by most lenders to ensure the car is worth the amount being borrowed or close to it. Many lenders will approve a loan for more than 100% of the car’s value, but most cap the LTV ratio for refinancing (and used car loans) at about 125% to 150%.

The type of car and its history are also considered by some lenders. Some may have restrictions on the make, model, and type of vehicles they will refinance, such as commercial vehicles and large-engine trucks. Cars with branded titles, which indicate some type of damage or defect in the car’s past, often fall on a lender’s restricted list. Examples of this include cars with flood damage or those that have been declared a total loss by an insurance company after an accident.

Credit Requirements for Refinancing an Auto Loan

When refinancing an auto loan, lenders take into consideration many of the same credit factors as they would with any other auto loan.

Your credit score is an important factor, most lenders have minimum credit score requirements for auto loans, usually within the 500s range on the FICO credit scoring model, but it can be higher or lower depending on the lender. It is recommended to check your credit report and score before applying for refinancing to see if your credit has improved and if you qualify for a lower rate.

Another factor considered by lenders is the debt-to-income ratio. Lenders want to ensure you have enough income to cover monthly debt payments and living expenses. They evaluate the debt-to-income ratio, which is the total monthly debt payments divided by gross monthly income. An acceptable debt-to-income ratio varies by lender but is usually around 50% to 60%.

Your payment history is also taken into account. Lenders look for a history of on-time loan payments for your existing auto loan and other loans. Late payments or loans that are not up-to-date may cause you to be turned down for refinancing.

Required Documents for Auto loan Refinancing

When looking to refinance your car loan, you will need to provide certain documents and information to the lender. This can vary depending on the lender, but typically includes the following:

• Proof of income or employment, such as a paycheck stub or tax return
• Proof of car insurance
• Your driver’s license
• Proof of residence, such as a utility bill, if the address on your driver’s license and credit report do not match
• Car registration paperwork and vehicle details, including the model, make, year, and VIN
• Information on your current car loan and payoff amount from the current lender
• For online applications, a photo of the car’s odometer reading may be required
• Signing a limited power of attorney to allow the lender to modify the vehicle title and add themselves as a lienholder

MORE: 5 Tips For Refinancing A Car Loan

Tips for Auto Loan Refinancing Success

If you don’t qualify for auto loan refinancing with one lender, it’s worth considering other options. Different lenders may have different requirements, so it’s important to shop around and compare offers.

However, even if you do meet the requirements for refinancing, it’s important to weigh the pros and cons of the decision before proceeding. Consider your individual circumstances and determine if refinancing is the best choice for you.

MORE: Refinance Your Car Loan: Things To Know

Questions Answered in this Article

1. What is auto loan refinancing? Answer: Refinancing a car loan involves replacing your current loan with a new one to lower your interest rate, reduce monthly payments, or pay off the loan sooner.
2. What are the requirements for refinancing an auto loan? Answer: Lenders will consider your credit and vehicle information, such as mileage and the recency of your current loan, but may have time requirements for when you can refinance. Most lenders will not refinance their own auto loans.
3. How long does the process of refinancing an auto loan take? Answer: The process of obtaining the title can take several months, making the overall refinancing process take anywhere from two to three months.
4. What are the requirements for the vehicle when refinancing an auto loan? Answer: Lenders typically have specific requirements for the vehicle such as mileage and age, loan-to-value ratio, and type of car and its history.
5. What are the credit requirements for refinancing an auto loan? Answer: Lenders take into consideration many of the same credit factors as they would with any other auto loan, including your credit score, which is an important factor, and most lenders have minimum credit score requirements for auto loans, usually within the 500s range on the FICO credit scoring model. It is recommended to check your credit report and score before applying for refinancing.