What do you need to refinance your car? Learn everything you need to know from our automotive experts. From proof of your gross monthly income to the vehicle’s title, you’ll need to collect a few important documents to get the ball rolling. The choice to refinance your current auto loan is a big decision. Most financial gurus like Dave Ramsey recommend that consumers steer clear of accumulating more debt, and that’s good advice.
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However, refinancing your car loan could save you money on your monthly payment and beyond, especially if you financed your automobile through the dealership. Before you sign on the dotted line, you’ll want to confirm you and your vehicle qualify for a refinance and a fixed-rate loan. If you don’t meet the necessary refinance requirements, you could be wasting your time.
While each lender has its own conditions, most banks ask for a few documents to get the process started. Before you can save money on your monthly payment, you’ll need to retrieve a few records from your files, such as your title. Don’t worry if you don’t have everything on hand. You can usually get copies with a simple request to your employer, property manager, or insurance company.
We’ll explain the importance of these documents and where to find them. You’ll also learn about other factors that can improve your chances of approval, including a good credit score. Then, you can decide if you have what you need to refinance your car loan.
On-Time Payments
To refinance your car, you must be current on your existing loan. One of the most beneficial aspects of refinancing is the money-savings. However, if you’re already behind on your payments, another lender is unlikely to extend you credit.
Extended Loan Term
Lenders also look at how long you have left to pay on your loan. The amount of time is important because most banks want at least a six-month loan term before they will consider refinancing. This requirement gives the company a look into your payment habits to ensure you have a history of on-time performance that leads to good credit scores.
For example, if your five-year loan only has three months left before you pay it off, it’s unlikely you’ll be able to get refinanced. Consider whether the best course of action is to pay it off, even if your payment is unusually high.
Large Loan Balance
Your original lender also wants to ensure your balance is large enough to make a profit off the interest. While minimum loan amounts vary, most banks want to refinance at least $3000 to $5000, so you must ensure the vehicle is worth the effort before applying.
The opposite is also true. For example, if you purchased a $70,000 luxury model and want to refinance it within the first year, thanks to depreciation, you might owe more than it’s worth. This situation is called negative equity, and finding a lender to refinance your car loan will be challenging until you pay it down.
Minimum Credit Scores
Both car and personal loans can improve or hurt your credit score, depending on your payment habits. This rating is an essential factor in whether you meet the refinancing requirements. If your original loan has a high interest rate, and you’ve raised your score since you took it out, you might be able to secure a better rate.
Low Debt-to-Income Ratio
Your debt-to-income ratio is the comparison of your monthly loan payments to your income. Lenders use this percentage plus a minimum credit score to determine if you can afford to take on more expenses. While refinance requirements vary between lenders, it’s best to keep your figure under 50 percent for the best funding chance. If your ratio is too high, you might have to pay down some of your debt, such as credit card bills, before you can secure approval.
Proof of Income
In addition to a good credit score, one of the best ways to show a new lender your personal finances are in order is with proof of income. Whether you’re employed or you get a retirement check each month, providing verification of these funds is a requirement to refinance with any lender. You can document your earnings in a variety of ways, from tax returns to pay stubs, depending on the income source:
- Hourly and salaried employees: Traditional employees should plan to provide pay stubs for the last two pay periods to refinance a car loan.
- Freelance and contract workers: These workers can provide 1099s from all companies or a copy of last year’s tax return.
- Self-employed individuals: Most lenders request two years of tax returns from self-employed workers and small business owners. If you don’t have your copies, you can request one online from the IRS.
- Odd jobs: If your debt-to-income ratio is on the qualification borderline, providing proof of your income from odd jobs might help convince the lender you have the resources to pay for a new car loan.
Proof of Residency
Some banks might request proof of residence for an auto refinance, particularly if the address on your driver’s license differs from where you currently live. A lender might also request proof of residence if there’s a discrepancy in your credit report. You can provide proof of residence through your:
- Utility bill
- Bank statement
- Lease agreement
- Property tax bill
- Homeowners insurance policy
Proof of Insurance
Proof of car insurance is another document you’ll need to refinance your car loan. A copy of your policy’s ID card might do the trick. However, you’ll probably want to provide your insurance policy’s declaration page. This document contains valuable information about your coverage amounts, including liability limits and comprehensive and collision protection.
Low Mileage Reading
You can’t take out a car loan without knowing your vehicle’s information. Lenders have specific refinance requirements when it comes to the car’s age and odometer reading. If it’s too old or has too many miles on it, they’ll deny your application. For example, if you bought a heavily used car with more than 100,000 miles on it, after a year or two of use you could rack up enough miles to exceed your lender’s cap.
A Newer Vehicle
Some banks also set limits on the age of your vehicle. They won’t refinance an older car, even if it has a low mileage reading. While one bank might set a hard limit at 10 years, another might require your vehicle to be less than eight years old to refinance the loan.
Your Vehicle’s Information
You can find most of your vehicle information, except the payoff amount for your current loan, on your registration card. You must contact your lender to get that amount. Make sure your automobile qualifies for a refinance by collecting the following information:
- Make
- Model
- Year
- Vehicle identification number (VIN)
- Payoff amount
A Clean Title
To refinance your vehicle, you need a clean title in your name. This legal document means you own the car, and if you have a lien, the current holder is also listed. Most banks will avoid refinancing a vehicle with a branded, salvage, or rebuilt title.
Pros of Refinancing Your Auto Loan
Before you refinance your car, consider the pros and cons to ensure it’s the right financial move for you. The perks include:
- A lower interest rate: Your new lender might offer you a better interest rate, which will save you money over the life of the loan, especially if your credit score has improved.
- Reduced monthly payments: Refinancing can give you more time to pay your loan, reducing your expenses.
Drawbacks of Auto Loan Refinancing
Refinancing your car also has a few downsides, such as:
- A higher interest rate: If you don’t qualify for a lower interest rate than you have on your current loan, you’ll pay more, so consider improving your credit score before contacting the bank.
- A longer term: When you refinance, you risk extending your time to repay. This situation will cost you more in interest, even if you secure a low interest rate, because it will take you longer to pay off your balance.
What to Consider before Refinancing Your Auto Loan
Ask yourself these important questions before you apply for a new auto loan:
Is Your Current Interest Rate Competitive?
Compare interest rates from multiple lenders to see which one offers the best deal. If your loan already has a competitive rate, a new one might not be worth the trouble. Take advantage of online refinancing calculators to run the numbers, and remember the Federal Reserve routinely reviews rates. If the trends are increasing, consider waiting a year or until you outpace the minimum credit score.
Is Your Vehicle Worth It?
Before you refinance your car loan, calculate your loan-to-value ratio. This number will tell you much your vehicle is worth compared to how much you owe the bank. If your loan balance is close to its fair market value, you might want to refinance for the shortest term possible.
What Are the Terms of the New Loan?
One of the things you must know about your current loan is whether your current lender charges closing costs or prepayment penalties as part of its refinance requirements. Some banks bill as much as 2 percent of the remaining loan amount in early payoff fees. That means if you still owe $15,000 on your original car loan, you could pay $300 in prepayment penalties. You’ll also need to know other terms, such as the interest rate, loan length, and monthly payment, so you can compare offers.
Do You Have a Good Credit Score?
Banks require a minimum credit score, even for a loan program with a less-than-stellar interest rate. If your credit score is under 600, you probably won’t be able to realize much savings if you refinance. This fact is especially true if you have to extend the life of your loan to reduce your monthly payments to a more affordable amount because of your poor credit history.
Steps to Refinance Your Car Loan
The refinance process is very similar to how you got your first auto loan. You’ll follow these basic steps for the typical lender and loan program:
- Shop around: If you meet the refinance requirements, submit your application to multiple lenders along with all your documentation.
- Compare terms: Once you have your preapproval letters, compare interest rates, monthly payments, and other terms to narrow down the best deal.
- Receive your funds: Most banks will either deposit the money into your account or pay off your original lender directly.
- Start paying on your new loan: Once the bank sends you the funds, you’ll start making payments to the new lender.
- Enjoy your savings: After you pay off your original loan amount, you should be able to save money. Consider putting these funds toward other debt or saving for something special.
Refinancing your auto loan can be a wise financial decision if you have the documents and information you need to get started. Taking advantage of these guidelines will help minimize the stress and can help you get started right away. Always consider your ability to pay for the new loan amount and how it will affect your credit score before you commit.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
