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The Car Refinance Process Explained in FAQs

Brandon Cornett

By Brandon Cornett
© 2014 All rights reserved

Have questions about the car refinance process? You've come to the right place. Below, we have assembled some of the most frequently asked questions about auto refinancing.

1. How does auto refinancing work?

The process itself is fairly straightforward. It's not as complicated as refinancing a home, and there's less paperwork involved. That's the good news. The better news is that this process could save you a lot of money over time, depending on the rate you receive on the new loan.

When you refinance your car, you are basically replacing your existing loan with a new one. Ideally, the new loan will have a lower interest rate than the one you have now. This in turn could lower your monthly payments. That's the main reason why people pursue auto refinancing in the first place, to save money.

The new lender will pay off your old loan. Then the vehicle's title will transfer to the new lender (in most cases). Aside from the application and a couple of other steps, that's really all there is to it. The entire process can be completed in a day or two, barring any unforeseen complications.

To begin the car refinancing process, you'll need to apply for a new loan. You're probably familiar with this step already, because you went through it when you first financed the vehicle. You can even submit an application online, to see if you qualify.

2. When should I refinance my auto loan?

Does it even make sense to refinance your car right now? This is one of the first questions you should ask before moving forward. Refinancing should help you accomplish some sort of financial goal. If it doesn't, it's not worth pursuing.

Most people refinance their cars for one of two reasons: They want to lower their monthly payments by spreading out the loan, or they want to secure a lower interest rate to save money. You can even accomplish both of these things by refinancing -- you can reduce your monthly payments and your total interest costs at the same time.

The bottom line: If you can refinance your auto loan to accomplish one or more of these goals, then it probably makes sense to do it.

3. How do I get a better interest rate on the new loan?

Many people refinance their car loans in order to secure a lower interest rate. This could save you thousands of dollars over the life of the new loan, especially if you keep it for several years. You can get a lower rate in several ways. If your credit score has improved significantly since you took out the first loan, you'll probably qualify for a better rate on the new one.

Likewise, if average interest rates have dropped since you first financed the vehicle, you could secure a lower rate.

Since the interest is part of your monthly payment, this would effectively lower your monthly payments as well. This is why many people refinance their cars in the first place. They do it to reduce their payments and the total amount of interest they pay on the loan.

4. How much money can I save through the car refinance process?

This depends on several factors. The interest rate differential plays a big role here, obviously. If you lower the rate by a little, then you'll save a little. But if you can refinance into a much lower APR, your total savings could be significant.

It also depends on how far you are into your existing loan, and how long you'll be keeping the new one. If you refinance into a lower payment, you'll save a chunk of money each time you make a payment. The longer you keep the loan, the more money you would save -- with all other things being equal.

Let's look at some real-world examples:

John purchased his car six months ago. His FICO credit score was in the upper 500s at the time, so the dealer told him he would have to pay 11% interest on the loan. It was a five-year auto loan for a car worth $23,000. This equaled a monthly payment of about $500.

Now let's assume that John improved his credit score over the next few months. He does some research online, and he finds a company that offers auto refinancing. He applies for a replacement loan and gets a better rate this time around. His new payment is $400 a month. So John would be saving around $6,000 over the remaining term of the new loan.

In some cases, it's possible to save even more than this. The greater the interest rate reduction, the bigger the savings. If I had a 17% interest rate, but I was able to refinance into a much lower rate, I could save even more than John did. A lot more, in fact.

5. What credit score do I need to refinance my car loan?

This is a question many consumers ask. But it's not the right question. The question you want to ask is: What credit score do I need to get a lower interest rate on the new loan. Remember, the car refinance process is only worthwhile if it helps you achieve your financial goals -- a lower rate, a smaller monthly payment, a faster payoff, etc.

Every lender will interpret your score differently. They all have their own lending standards and criteria. So there is no magic number that applies to all refinancing scenarios. With that being said, having a credit score above 620 is a good starting point. This number is widely used by lenders to distinguish between "good" and "subprime" borrowers. Subprime means you have a lower score than most people, so you won't be offered the best rates. In some cases, a bad score can prevent you from getting an auto refinance loan altogether. So you might want to check your credit to find out where you stand.

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