How to refinance your car loan and put cash back in your pocket

Financial situations change all the time, so it’s important to be flexible and ready to act. Along with sound budgeting and long-term financial management, refinancing your car loan can be a good way to put extra money in your pocket. While it pays to be careful in order to avoid future financial stress, there are many great reasons to refinance your car loan.

Perhaps your life has changed? Maybe your credit has improved? Perhaps you want to access better rates or terms? Let’s take a look at the ins and outs of auto loan refinancing so you can make the right decisions for your future.


What is car loan refinancing?

When you refinance an existing car loan, you’re taking on a new loan under different conditions. In this situation, the amount of money left on your existing car loan is carried over to your new loan. While this might seem pointless at first glance, there are many things you can change to alter conditions in your favor. You can’t reduce the balance from your loan, but you can change the interest rates, loan terms, loan conditions, and payment options.

When should you refinance your car loan?

Everyone has different financial resources and obligations. People face different circumstances as they get older. Jobs come and go, and families change shape over time. As your life evolves, you may wish to adapt your financial situation. While there are countless reasons to refinance a car loan, they all fit rather neatly into the following two categories:

1. Your financial situation has improved

If your financial situation has gotten better in any way, it may make sense to refinance your car loan. Maybe your credit has improved and you want to qualify for a lower interest rate? Perhaps you have a new job and want to pay your loan down faster? Maybe you’ve accumulated more savings and want to remove the original co-signer from the existing loan?

Refinancing with a new loan can help you to get better rates, improved terms, or enhanced financial outcomes. If your existing loan is not in alignment with your current financial resources and needs, it may be time to make a change.

2. Your financial situation is challenging

Some things are consistent in life, and there’s nothing more regular than incoming bills. If you struggle to pay for groceries and utilities due to high car loan repayments, it may be time for a shift. Maybe you’ve lost your job and have less disposable income? Perhaps you need to cover costs for a medical emergency? Maybe you want to relax your weekly budget by lengthening the duration of your car loan?

Refinancing with a new loan can lead to lower repayments. While it may end up costing you more over time, refinancing can be a good way to reduce your expenses in order to meet your immediate needs.

Is it a good idea to refinance a car loan?

If you’re thinking seriously about refinancing your car loan, it’s important to analyze the details. While refinancing can be a good decision in many situations, it can also increase financial stress down the track. Generally speaking, if your financial situation has improved, you will benefit from changing your loan agreement. If your financial situation is challenging, any short-term gains are likely to come with long-term costs.

The car loan refinancing process

While there are many reasons for refinancing, the process involved is the same for everyone. Before you sign a new contract, you need to make a determination based on what’s right for you. Be honest with yourself throughout this process, think about your current needs, and try to anticipate your future situation.

The following steps are a great place to start:

  1. Think about your reasons for refinancing.
  2. Collect the necessary documents.
  3. Compare deals and apply for pre-qualification.
  4. Complete the loan application process.
  5. Confirm changes with your old lender.
  6. Start a financial plan to meet your new loan obligations.

Once you understand the basic steps involved, it’s time to dig down into the details. While information may differ between people, jurisdictions, and lenders, the following questions need to be answered to ensure the right decisions.

Will there be any fees or penalties?

Before you make a big decision about refinancing, it’s important to be aware of any potential costs. From fees and charges to prepayment penalties, there’s a lot to think about before you sign on the dotted line. Many car loans have a prepayment penalty, and depending on the institution, the amount of money on the table can be quite large. If the penalty is substantial, it may remove the incentive for refinancing.

In most situations, changing loan structures or lenders means new fees. In order to determine your financial responsibilities, you will need to read the fine print or talk directly with your lender. For example, there may be fees to change lenders, alter terms, or re-register the vehicle and transfer the title. Many of these fees differ between lenders and states, so you will need to do a little homework.

It’s not all bad news, though – some banks and lenders even offer a cashback program to encourage people to change. While the amount of money offered is generally quite small and it’s normally covered by the loan, this can be a welcome boost if you’re facing an economic hurdle. Short-term cash incentives are not a big enough reason to jump ship, however, especially when there are other costs involved.

What’s the difference between the outstanding loan amount and the value of the car?

The amount of money left on your car loan can have a significant impact on your refinancing options. Generally speaking, if the outstanding loan amount is higher than the car’s market value, your options will be limited. While you may be able to get a different loan from a new institution, the terms are unlikely to be any better. This situation is known as being upside down on a loan, and it offers little appeal to lenders.

Even if your loan numbers are in good shape, the age of your car may come into the equation. Some lenders are unwilling to refinance loans for old cars or those with extended mileage. Once again, details can differ widely between lenders, so you need to ask the right questions. While you may be able to roll the outstanding balance into your new loan, better interest rates and terms are unlikely if you have a large outstanding loan amount or a very old car.

Does refinancing a car hurt your credit?

Just like other types of refinancing, altering the terms of an auto loan does have the potential to adversely affect your credit score. In most cases, you are likely to see a small reduction in your credit score. If you qualify for and accept a loan offer, you’re likely to see another dip. Regardless of what the loan is for, getting more credit will always have a negative impact on your score.

On the other side of the coin, paying down loans on time will keep your credit score in healthy condition. Small blips in your credit score are not necessarily important, however, especially if you’re likely to see other benefits. For example, if your credit has improved since you took out the loan, refinancing could result in a lower interest rate and big savings. If your credit hasn’t improved, however, obtaining a lower rate can prove difficult.

What credit score do I need to refinance my car?

Your credit score helps determine the auto refinance rates available to you. Generally speaking, better scores will give you more options in terms of both loan products and lender access.

While there are multiple scoring systems available in the United States, they all function in a similar way. The higher the score, the better the rate, and the more chance you have to access a good loan. Credit bureau Experian breaks its scoring system into the following categories:

  • 781-850: Super prime
  • 661-780: Prime
  • 601-660: Near prime
  • 500-600: Subprime
  • 300-499: Deep subprime

If you have a prime credit score of 660 or higher, you are likely to receive the best car auto loan rates. While lower scores don’t eliminate your options, they are likely to limit them. If your credit score has improved over time, you may qualify for a lower interest rate.

Can you refinance a subprime car loan?

While it’s possible to refinance your car loan with subprime or bad credit, it may be difficult to get a lower interest rate or better terms. Even if you do get a new loan, you may be at risk of developing unsustainable debt or becoming upside down on your car loan. There are always options available to people with bad credit, however, including community-based lenders that are committed to credit union ideals and values. Not-for-profit credit unions and similar institutions do offer subprime refinancing loans with favorable conditions.

What documents are needed to refinance a car loan?

Much like bills, paperwork is another unavoidable aspect of modern life. If you’re applying for a new car loan, you need to have the right documentation. Essential documents include identification, social security number, employment and address details, proof of income, and evidence of auto insurance. While there are differences between states and lenders, tax documents, pay slips, and bank transaction details can all prove important.

Detailed information about the car and current loan agreement will also be required, including the vehicle identification number and current loan balance. While hard copy documents will be needed when you apply for a loan, information alone is still valuable in order to compare lenders and car loan options online. When comparing lenders, you should look at interest rates, fees, loan terms, and the total amount and cost of borrowing.

In many situations, applying for pre-qualification is advised, with a number of documents needed during this process. In order to become pre-qualified, the lender will look at things like your credit score and type of vehicle. While pre-qualification is not a guarantee of approval, it gives you a good idea of what you can achieve. There is little downside to this process, with pre-qualification treated as a soft inquiry with no impact on your credit score.

When should you refinance your car loan?

Refinancing a car loan offers a number of potential benefits, but it also comes with a few risks. If you’re thinking about going down this path, it’s important to do it for the right reasons. Generally speaking, refinancing is a positive option if you’re able to access better interest rates and loan terms. If your financial situation has improved since you took out the original loan, you may be able to access a much better loan. If you relied on a parent or sibling to co-sign the original loan agreement, accessing a new car loan may also give you greater control and freedom over your finances.

What is the downside of refinancing a car?

Refinancing a car loan is not all good news, however, especially if you’re doing it for the wrong reasons. While refinancing can provide immediate and ongoing financial relief when repayments are reduced, this is not always a good option. You should always think twice about extending the duration of your loan or swapping out interest rates for less favorable terms. Just like other forms of lending, it’s important to balance short-term gains with long-term value.

About DCCU

At DCCU, we offer a range of banking services to the residents of Madison, WI and surrounding counties. We are committed to improving the economic and social well-being of our members. We proudly help people from a range of socioeconomic backgrounds, including low and moderate-income members. Our member-owned financial cooperative adheres to the credit union philosophy of “building lifetime relationships through personalized financial service.”

At DCCU, our values are strong and our message is clear: We are “a local neighborhood Madison credit union that stands for you.” DCCU is a not-for-profit credit union wholly owned and operated by its members. We love helping local people find financial solutions, including competitive refinancing opportunities for car loans. If you would like to refinance your car loan or learn more about our services, please contact DCCU today.


Published by

Jen M.

Jen has been with DCCU since she graduated from UW Madison - a long time ago. As the Content Strategist she helps share all the amazing things DCCU does in our community and spreads the credit union philosophy of People Helping People. When she's not working for the best credit union in south central Wisconsin, she's busy with 4 kids and a feisty little dog at home. She formed her family through adoption and has a deep passion to support foster and adoptive parents and kids. Her favorite place to relax is poolside or in front of the fireplace.