What Happens When You Refinance Your Auto Loan?

Refinancing your auto loan involves replacing your existing loan with a new one, often to secure a lower monthly payment amount, reduce your overall costs or both. 

But what exactly happens when you refinance a car? 

From finding a new lender to paying off your existing loan, here’s what you can expect during a refinance.

‍

Does refinancing restart your car loan?

Refinancing your car loan replaces your current loan with a new one, but it doesn't mean you're starting over. The new loan only needs to cover your remaining balance, which is usually less than the original loan amount. You can also choose new repayment terms that are shorter or longer than your original loan.

‍

However, one thing that does reset when you refinance is your amortization schedule. Car loans are structured so that, in the early stages, a larger portion of your payments goes toward interest. When you refinance, you restart this schedule, meaning more of your payments may go towards interest again.

‍

Does refinancing extend your car loan?

Whether refinancing extends your loan or not depends on the repayment term you choose. You get to decide on the new loan term you want which may extend, shorten or match the term on your current loan. 

Extending your loan term typically results in a lower monthly payment amount but a higher overall cost. On the other hand, shortening your loan term generally increases your monthly payment amount but lowers your overall cost.

‍

The refinancing process step-by-step

What happens when you refinance a car? Here are the key steps in the process.

‍

1. Review your current loan, car and credit

If you’re interested in refinancing your car, a good first step is to take stock of your situation. To do so, you’ll want to: 

‍

• Check your credit. Have your credit scores improved since you got your first loan? If so, you’ll be better positioned to get a lower interest rate. Also, ensure your credit reports are accurate, and look for opportunities to improve your score. 
• Check interest rate activity in the market. Have interest rates in the market dropped since you got your loan? Lower benchmark rates could also help you get a lower rate. 
• Review your current auto loan. Take note of the outstanding balance, interest rate, remaining term and remaining interest costs on your current loan. ‍
• Check the fair market value of your vehicle. Request an estimate of the fair market value of your vehicle. You can get customized quotes from sites like Edmunds and Kelly Blue Book. Compare the value to your outstanding loan balance to see if your equity is negative or positive. Negative equity can be an obstacle in refinancing because it presents more risk to the lender.

‍

2. Shop around

The next step during a refinance is to shop around and request quotes from different lenders. You can do this from the comfort of your home as many lenders allow you to check if you prequalify online. Review and compare quotes to see if any lender offers a deal that justifies the refinance. Be sure to consider how a new loan will impact both your monthly and overall costs. Our auto loan refinance calculator can help you run the numbers.

‍

3. Get your new loan

If you find a new auto loan you want to move forward with, notify the lender and complete the full application process. You’ll often need to provide the following:

‍

• Drivers license
• Vehicle registration
• Odometer photo
• Proof of insurance
• Proof of income
• Proof of residence
• Vehicle title

‍

Upon approval, you’ll be sent a loan contract to review and sign. Once complete, the lender will fund the loan.

‍

4. Pay off your old loan

Refinancing involves replacing your old loan with a new one. In most cases, your new lender will pay off your old lender directly. However, you may receive the loan funds and be responsible for paying off the old loan. When you’re responsible, contact your lender and request a payoff letter. You can then schedule the payment and follow up to ensure the account is closed.

‍

5. Begin payments on your new loan

The final step is to begin making payments on your new loan. Log into your new lender’s account portal and get familiar with the payment process. Take note of the monthly payment amount and due date. You may also want to schedule automated payments so you don’t have to worry about making them manually each month.

‍

What changes when you refinance

Several things happen during a refinance, including changes to the following: 

‍

• Term: You can extend or shorten the number of monthly payments required to pay off your loan amount. The shorter the term, the higher the monthly payments but lower the overall cost. Extending your term may also increase your overall cost.
• Monthly payment amount: You can adjust the loan term so your monthly payment is higher or lower than your current payment amount. Find a monthly payment that best suits your budget and overall financial goals. 
• Interest rate: The percentage of the loan amount you’ll pay in interest each year can also change. Refinancing can help you save if you’re able to get a lower interest rate than you currently have.
• Overall cost: The total amount you’ll pay in interest and fees over the life of the loan will likely change. 
• Payment date: The date your payment is due each month will likely change. You may be able to select a date that better suits your budget. 
• Lender: You may find a better deal with another lender, although some lenders offer competitive internal refinancing to existing customers. 
• Title: Your title will need to be transferred to your new lender. ‍
• Credit score: Your credit score can be impacted by various aspects of the refinancing process including the hard inquiry during the application, the closure of your current credit account and the opening of a new credit account.

‍

FAQs

Here are some frequently asked questions about the auto loan refinancing process.

‍

What happens to your old loan when you refinance?

When you refinance an auto loan, your new lender will typically use the funds from the new loan to pay off your old loan for you. In some cases, however, you’ll be sent the funds and responsible for paying off your old loan. Once paid off, the lender should close the account and notify the credit bureaus it’s been paid in full.

‍

When you refinance a car loan, do you get money back?

A traditional auto refinance loan doesn’t provide you with money back. You just borrow the amount you need to pay off your outstanding car loan. There are cash out auto refinance loans that allow you to cash out some of the equity you have in your car, but these loans are riskier than standard loans. When you borrow more than your car is worth, you’ll have negative equity.

‍

Will my payment increase if I refinance my auto loan?

Your monthly payment amount can increase if you refinance your auto loan but it could also stay the same or decrease. Changes will depend on the details of your new loan, including your loan amount, interest rate and repayment term.