How to refinance your car loan

When you refinance a car loan, you replace your existing financing with a new loan, typically with a lower interest rate or smaller monthly payment (or both).

The application process should take less than an hour and a lender can often give you a decision within a day. But that speed doesn't mean there aren't many important steps along the way.

Car owners usually refinance their auto loans to make them more affordable. That might mean a lower interest rate, decreased monthly payment or a shorter term. It's not guaranteed that you'll get all three, so you need to decide which to prioritize.

To save the most, think long term and focus on lowering your rate or paying off the loan faster. This way, you'll pay less in interest over the life of the loan.

If your priority is freeing up space in your monthly budget, however, focus on lowering your payment by taking on a longer term. That usually means you'll be paying more in interest over the long term, however.

Pay close attention to your current interest rate. If you financed your car when rates were lower, you're unlikely to get much (if any) benefit from refinancing in a higher-rate environment. If auto loan rates have dropped since you took out your loan, however, the savings could be significant.

Lenders also want to look at your payment history, term and the payoff amount on your current car loan. Most require at least 6 monthly payments (often more) and 12 months left on the loan before they'll approve refinancing.

They're also unlikely to approve refinancing if you don't have much left to pay off. The typical minimum loan amount is between $3,000 and $7,500, depending on the lender. You can find your loan balance on your lender's app or website, on your monthly statement or by contacting your lender directly.

Resources like Edmunds.com and Kelly Blue Book can help you estimate your car's value. If you owe more on your vehicle than it's currently worth, you have negative equity — also known as being "underwater" or having an upside-down loan. That can make it hard to find lenders who will approve refinancing.

Credit unions like PenFed Credit Union are known for their flexibility, financing up to 120% or more of a vehicle's value.

Online marketplaces like MyAutoLoan and Caribou are also good options if you're saddled with negative equity. They work with a large network of lenders, so the chances that you'll find one that accepts a higher loan-to-value (LTV) ratio are better.

You also need to consider how old your car is. will only refinance passenger vehicles under 10 years old with less than 100,000 miles. There may be other exclusions as well, such as discontinued models, salvage or flood-damaged titles and heavily modified vehicles.

Credit plays a crucial role in whether you'll get approved. A good credit score (FICO score of 670 or higher) can get you approved more easily and secure favorable terms.

Check your credit score before applying. Most credit card issuers offer a free version of your score in their mobile app or you can enroll in Experian's free credit monitoring service and get an updated credit report and FICO credit score every month. If your credit isn't in the best shape, you may want to pause the refinancing process to improve it.

Your credit isn't the only factor lenders will consider, however. They'll want to see that you have a steady income, a history of on-time payments and a low debt-to-income ratio (typically under 50%).

Ready to refinance? You'll need the following:

• Your driver's license
• Proof of income
• Your auto insurance information
• Proof of residence if the address on your driver's license doesn't match your credit report records
• Your car's registration documents
• Your car's make, model and VIN
• Your current loan information

Your lender may have unique requirements and ask for additional paperwork or information. For instance, some online lenders can request a photo of your vehicle's odometer reading.

Shopping around ensures you're getting the best rate and terms. Some lenders charge titling or lien-holder change fees, so comparing offers can also help you find ones with few or no fees.

Many lenders allow you to prequalify online, giving you estimated loan terms based on the information you provided. Since this involves a soft credit inquiry, it won't affect your credit score the way a hard inquiry would.

You can prequalify with online marketplace Autopay and get offers from several lenders at once. In addition to traditional refinancing, you opt for cash-back refinancing and borrow against the equity you have in your vehicle, or choose a lease buyout to pay off your lease early.

Capital One also has a quick and convenient prequalification process. You can get several loan offers and choose the one that best fits your goals. The lender will assist you with transferring your title once you get approved.

Once you have a few offers, you can compare them and decide which one is the most advantageous. When you're ready to proceed with a lender, let them know you're ready to apply. If you get approved, the lender will create a new loan with the agreed terms. As for your old loan, your new lender will either pay it off or provide you with funds to complete this step yourself.

All that's left to do now is to begin paying off your new loan. Make sure you know the due date and consider setting up automatic payments.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed financial decisions. Every auto loan guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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