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What Does It Mean To Refinance a Car?

Marcus Personal Loan 2022 Reviews

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If you’ve bought a new or pre-owned vehicle and financed it under less than optimum terms, you might want to refinance it to help you save money. Refinancing your vehicle is a big step, and you want to understand the process and reasons for refinancing before making the commitment.

What Is Car Financing?

You have a choice of how to pay for your new or pre-owned vehicle — with cash or through financing. Most people decide to finance their vehicle through a financial institution and repay the loan over time according to the loan contract’s policy. You’ll also pay interest rates based on the current Annual Percentage Rate (APR) and your credit history.

What Does It Mean to Refinance a Car?

Refinancing your car means finding a new lender who will create a new loan with new terms, interest rates, and monthly payments. The new lender will pay off your old loan, and then you make your monthly payments to the new lender. When you refinance, look at the new interest rate and loan terms (the time you have to pay the loan back). While you may get a better interest rate with a long-term car loan, you want to crunch the numbers to make sure you don’t pay more than the original loan.

How Easy Is it to Refinance My Vehicle?

Most banks or lending institutions make obtaining a loan simple, and you can usually do the process online. Once you’ve found a lender and loan you’re comfortable with, gather the necessary documents and fill out the loan application. Most lenders will get back to you fairly quickly, and after you sign the finished application, the lender will pay the old loan off and you’ll now make your payments to the new lender.

What Do I Need for My Refinance Loan?

As with most loans, you’ll need certain documents to get approved including:


Lenders want proof of your identity. You can use a state-issued driver’s license, REAL I.D. card, or passport.

Proof of Employment and Income

Lenders want to see that you have sufficient income to repay the loan and will ask for pay stubs, 1099 forms, W-2 forms, or tax returns based on your employment status.

Proof of Residence

Occasionally, the lender will want some type of proof of residence that may include:

  • Mortgage statement
  • Rental receipt
  • Bank statement
  • Utility bill with your name on it

Document of Insurance

Understandably, the lender will want to see proof of current car insurance. You can use a copy of your policy or your insurance identification card.

Vehicle Information

Your new lender will need information about your vehicle including:

  • Make of the vehicle
  • Specific model and trim
  • Year
  • Vehicle Identification Number (VIN)
  • Payoff amount for your current loan

You can find the vehicle information on the registration card. Contact the lender of your current loan to find the payoff amount or access that information through your online account with them.

Why Would I Want to Refinance My Car?

There are several reasons for refinancing your vehicle, including:

Lowering Your Monthly Payments

One of the main reasons people refinance is to lower their monthly payments. If you’re struggling to make your monthly payments, changing the loan term length can lower them.

Changing the Interest Rate

If you had a high interest rate with your original loan, shop for a loan with a lower interest rate. For example, if your initial loan was at 6%, lowering it to 3% can save you a lot of money.

Altering the Length of the Terms

When you have a longer term to pay off your loan, your monthly payment will drop. This will usually also cause you to pay more interest as well, so balance the term and your interest rate to best suit your needs.

When Is the Best Time to Refinance My Car?

Consider the following situations when deciding the right time to refinance your car:

When Interest Rates Drop

Interest rates vary all the time. When the rates go down and you refinance, you won’t pay as much on the overall interest.

Your Credit Score Improves

Lenders look closely at your credit score and history. If you had a low score when you first financed your vehicle, you had a higher interest rate. As your score improves, you can refinance with a lower interest rate.

When Shouldn’t I Refinance My Auto Loan?

Sometimes, refinancing makes little sense, including when:

You’re Happy With Your Current Auto Loan

If you have a great loan with low-interest rates, terms you’re comfortable with, and ideal monthly payments, you don’t need to refinance.

The Car Loan Is Almost Paid Off

Interest decreases as you pay off your loan. Most of the interest is paid off on the front end of the loan and by the end, you’re paying on the principal of the loan. If you’re at the end of the loan, there’s no need to refinance your car.

You Have a Prepayment Penalty

Some loans have a prepayment penalty. Check your current loan and see if it has a penalty and weigh the costs of the prepayment penalty against the new loan terms.

You’re Credit Hasn’t Improved

If you haven’t brought your credit score up, you probably won’t get better terms and it isn’t worth paying the extra loan refinancing fees.

The Car Is Old With Significant Miles

Cars depreciate quickly, and if your car is older with lots of miles, the lender may not offer you a new loan. For instance, some lenders won’t refinance if the car is over 7  years old and has over 90,000 miles on it.

You Don’t Want a Hit on Your Credit

Keep in mind that when looking for a refinance loan for your vehicle, the lender will check your credit score and you’ll take a hit. If your credit is good, the hit shouldn’t affect it too much. Continuing to pay your bills on time after refinancing will bring your credit score back up again quickly.

Refinancing your car is a simple process that can help you save money to use for other purposes. Before you consider refinancing your vehicle, make sure the time is right, you fit the requirements, and you find the right lender who’ll work with your budget and financial needs. Once you decide that refinancing your car loan is the right choice, gather your documents together and start shopping for your new lender.

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

We’re here to help you simplify car care and save, so this post may contain affiliate links to help you do just that. If you click on a link and take action, we may earn a commission. However, the analysis and opinions expressed are our own.


About the Author

FIXD Research Team

FIXD Research Team

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.

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