Refinancing your auto loan means replacing your existing loan with a new one from a different lender. Your current loan gets paid off by the new lender and you start making monthly payments, hopefully, smaller ones, on the new loan.

If you think your credit has improved since you bought your car, you should look into auto loan refinancing. There’s a good chance you can lower your interest rate and end up with a smaller monthly payment. You might also be able to shave some time off the loan, or go the other way and extend the term of the loan if you’re having trouble making your monthly payment.

What’s the catch? There isn’t much of one: It takes some time, and your credit profile might take a slight hit when you apply for the new loan. However, know two important things:

1. Most auto loans don’t have a prepayment penalty so refinancing won’t cost you anything.
2. Submitting an application for refinancing has no application fees, and the funds become available quickly, often within a day.

Why you might want to refinance

The prospect of paying less interest or lowering your monthly payments are the main reasons to consider refinancing. Let’s say your current auto loan has a 10% interest rate, and you’ve been making payments for a year or so. Chances are, your credit has improved and you could now qualify for a lower interest rate, which could lower your monthly payments. If you simply went to your current lender and asked it to lower your rate, it would probably say no. After all, you signed a contract at a certain interest rate and the lender wants its money.

Lucky for you, in today’s competitive market, plenty of other lenders are eager to get your business. When you refinance, you simply go to another bank, credit union or online lender and show it how much you still owe, called the balance of the loan. It pays off your existing balance and creates a new loan; and you start sending your monthly payments to the new lender.

If you meet the requirements, refinancing your car loan for a smaller payment could allow you to put more into savings, investing or a home improvement project. Or you may be able to pay off your car sooner. All of these options are better than pouring your money down the drain by paying more interest than you need to on a car loan.

When refinancing your car loan makes sense

Refinancing your auto loan could be the right move for reasons other than your improved credit. Even if you’re satisfied with your current loan, it doesn’t hurt to see if you can save money on interest. It makes sense if:

Interest rates have dropped. Interest rates fall for a variety of reasons: a changing economic climate, increased competition in the banking industry, even regulatory changes. If interest rates are lower now than when you first got your car loan, refinancing is likely to lower your rate and could help you pay the loan off sooner. Or, it could save you money on interest. It only takes a few minutes to apply for refinancing and see if a new lender — a bank, credit union or online lender — will offer you a lower interest rate.

A car dealer marked up your interest rate. When you got your existing loan, the car dealer might have charged you a higher interest rate than you could have qualified for somewhere else. This often happens to shoppers who don’t check their credit score before buying a car. They are persuaded to take the dealership’s loan because they didn’t shop around for the best interest rates. But you can undo the damage by refinancing and getting a new loan at a lower interest rate.

You can’t keep up with payments. Maybe you got overexcited at the dealership and bought a car that’s really too expensive for you. You might be struggling to keep up with payments. Or maybe you’re facing unexpected financial challenges because of a job change or other circumstances. By refinancing your car loan, you can take more time to pay it off, and this will lower your payments. You should think carefully before taking this course of action: If you extend the loan term, you’ll pay more in interest over the life of the loan. That’s not optimal — but it’s better than damaging your credit by missing payments.

Whether your goal is to lower your monthly car payments or reduce the total interest you pay on your car loan, it’s important you understand how refinancing your car loan works.

Refinancing your car loan is replacing your current auto lender with another lender. This involves changing the name of the company that is listed on your car’s title, which is a document that details proof of official ownership. That means you will make payments to the new lender until your loan is paid off.

Before checking your rate for a car refinance loan check to make sure that when you obtain a quote it won’t be a hard inquiry on your credit report. This can impact your credit score. When you apply, a lender will look at your credit profile, as well as the make, model, trim and mileage of your car to determine your rate. You won’t need to have your car appraised the way you do when you refinance a home. Lenders will look at the value of your vehicle relative to how much you owe on the vehicle, called your Loan-to-Value ratio.

What else lenders will look for

Lenders will also look at how many payments you have left on your current auto loan to understand if refinancing is worthwhile for both parties. Typically, you need a minimum of a few months to show on-time payment history but after that, the more recent your current loan is the more potential refinancing will have to save you money. The way that many auto loans work is that the majority of the interest is paid during the beginning of the loan. Check the amortization schedule of your current loan to see what percentage of your payments are interest payments.
Once you get your rate, you should evaluate if the rate or terms offered to meet your financial goals. You should also make sure that you understand any additional fees or prepayment penalties so you can understand the total cost of the loans you’re comparing.

The process

Once you select your lender, there are certain documents you need to refinance your car loan. For example, your insurance and registration cards.

Once everything is verified and approved, you may be asked to complete a Power of Attorney (POA) form so your car title can be transferred from your previous lender to your new lender. A POA shows that you have authorized the title transfer to the new lender.

Your current lender will then pay off your previous lender. When you receive confirmation that your refinance is complete, your new lender will be responsible for your loan. You’ll make payments directly to them and contact them for any questions or concerns.

Depending on how fast you can submit your documents, many lenders will take between a few days to a few weeks to complete the refinance.

Want to check your rate to see how much you could save with a car refinance loan through Lending Club? Check your rate with no impact to your credit score.

Refinancing your auto loan can save you money on interest, lower your monthly payments, or potentially do both. With online lenders reducing the hassle of the refi process, it can be a no-brainer for some people. But if you only recently bought your car, or you’ve had it for a few years, you might be wondering:

• “When should I refinance my car?”

• “How soon is too soon?”

• “Is it too late to refinance?”

To remove the guesswork, here are five signs that could indicate now is a good time to refinance your car.

1. You purchased and financed a vehicle at a dealership

Did you buy and finance your car at a dealership? You’re not alone – over 85% of new vehicle sales and over 54% of used vehicle sales are financed.¹And if you bought your car at a dealership, there’s a good chance you financed it there, too. What you may not know is that dealer-financed auto loans are often not the best deal.

Auto dealers can mark up your interest rate, charging as much as 3% more than the APR you could’ve qualified for with another lender.²

Want to know if you can do better? It takes just one minute to check your auto refinance rate with Youautomotive.com, and it doesn’t affect your credit score.*

            2. You’ve had the loan for at least 90 days

How soon can you refinance a car you just bought?

Most lenders require that you’ve had the loan for a few months before you apply (at Youautomotive.com, the minimum is 90 days). This is usually to confirm that you’re making on-time payments, so stay on top of those payments if you’re hoping to refinance in the near future.

            3. Your current loan term is longer than 24 months

On the flip side, if you don’t have long to go before paying off the loan, you may not be able to refinance. At Youautomotive.com, we require at least 24 months remaining on the term.

            4. Your credit has improved

Has your credit score increased since you took out the loan? Have you consistently paid your debts on time? If so, you may qualify for a lower rate than you did when you first bought the car—which means savings in your pocket.

You can check your credit report for free on an annual basis to monitor whether things are looking up.

             5. You could use the extra cash

Refinancing at a lower rate can lower your interest bill (Youautomotive.com auto refinance borrowers could save up to $1,350).³ However, you can also refinance to lengthen your auto loan’s term and reduce your monthly payment. If bills are tight, refinancing to lower your payments may be the solution you’re looking for.

When Should You Refinance Your Car?

Auto refinancing can make a lot of sense in some situations. In fact, many people don’t refinance their car even though they would qualify, simply because they think the refinance process will be long and arduous. That’s simply not the case anymore—Youautomotive.com’s auto refinances process is completely online and hassle-free.

If you want to know whether now is the time to refinance your car, check your rate now to get the answer in less than a minute, with no impact to your credit score.