Mortgage refinancing, especially with the historically-low interest rates of the last few years, is an increasingly common practice. But many borrowers don’t know that they can also refinance other loans to take advantage of better terms. That includes loans for vehicles.


In fact, Illinoisans who purchased their vehicles prior to the passing of the Illinois Predatory Loan Prevention Act in 2021 might have good reason to refinance. Many auto loan recipients who got their loans at dealers before this time may have an excessively high interest rate—some exceeding 36% when finance and other charges are calculated!


In addition to getting better interest rates, there are many other reasons why borrowers might want to get a new loan for their previous vehicle purchases, from lowering monthly payments to shortening your payment period. This guide will answer many common questions and concerns and tell you how you can get started if you decide that refinancing your auto loan is right for you!


Why Refinance Your Car Loan?

Refinancing your auto loan could be a great option if you're looking to find a better interest rate or adjust your monthly payments.

The number one reason you would want to refinance your loan is to get out the unfavorable terms of your current loan. Your current loan may be a bad fit in a number of ways. So when might it make sense to refinance?


  1. You didn’t get a great deal. While there are times when car dealers offer enticing incentives to buy a vehicle, including low-interest or interest-free loans, there are also times when dealer financing isn’t the best deal for you. When you get a loan through a dealer, they will often apply for a loan on your behalf to multiple lenders to try to get you a good rate. However, as Experian explains in the article “Bank or Dealership: What’s the Best Way to Finance a Car?”, “a dealer may negotiate a higher interest rate with you than what the lender offers and take the difference as compensation for handling the financing.”


Additionally, sometimes buyers, in the excitement of getting a new vehicle, might agree to terms too quickly without determining whether or not the loan is right for them. If you find yourself in this situation, take heart that you aren’t necessarily stuck with it. The sooner you refinance at a better rate, the sooner you can begin saving money!


  1. Your credit has improved. The good news is that if you have been consistently paying your current auto loan on time, there’s a good chance that your credit score has improved—maybe even enough that you fall into a new credit category! NerdWallet provides this handy index of credit score levels, but generally speaking, anything below 630 is considered “bad,” 630 to 689 is “fair,” 690 to 719 is “good,” and anything over 720 is “excellent.” Because your interest rate is often linked to your credit score bracket, even a small increase in your score can bump you up from one level to another, making a difference on what terms are available to you as a borrower.


Additionally, based on the industry, lenders might look at different aspects of your credit to determine your score. According to Equifax, “if you’re buying a car, an auto lender might use a credit score that places more emphasis on your payment history when it comes to auto loans.” If your payment history has improved since your loan, you could fall into a new credit score level and get a better rate.


Lastly, if you’ve recently gotten a better-paying job or a raise, or paid off credit card debt or another loan, that could change your debt-to-income (DTI) ratio and also qualify you for better terms. Lowering your interest rate not only can save you money each month and over the life of your loan, it can also shorten your repayment period!



  1. Your monthly payments are too high. If your currently monthly payment is too high for your comfort level, refinancing can sometimes alleviate that strain. Refinancing to a lower interest rate or extending the repayment period with a new loan (or both!) can decrease your monthly payment, making it more affordable for you.


Reducing your monthly payment amount can also be beneficial if you feel that the stretch for your current monthly payment puts you at risk for delinquency or default. Because it’s not possible to refinance if a loan is in default, refinancing when your loan is still current can help you avoid major financial pitfalls. By being proactive and reducing your monthly payment before it becomes a problem, you can keep your credit in good standing.


  1. Remove a cosigner. There are many reasons why you might no longer wish to be on a loan with someone else. Because your good credit depends on how you pay off your debts, unless you are comfortable sharing that responsibility with your cosigner for the life of the loan, it might be a good idea for the loan to be refinanced. While it is possible to remove yourself or someone else from a loan without refinancing (this is called loan assumption), lenders are usually not willing to do so—especially for a vehicle loan. Refinancing often offers a cleaner break, with the added bonus of potentially improving the terms of the loan!


When doesn’t it make sense to refinance? If you are paying off your loan in the next year, it might make more sense to stick with your original loan. Also be aware that some car loans have a penalty for paying off early, whether in cash or with another loan. Check the terms of the loan to be sure that you won’t have to pay a fee, or the fee is less than what you’ll save with a new loan. And finally, if you are planning to apply for another loan soon, like a mortgage, it’s not a great idea to apply for a new car loan because too many credit inquiries can hurt your credit.

How Do I Refinance My Car Loan?

Understanding your credit score and loan terms will help you determine whether or not refinancing your car loan should be your next step.

In order to refinance your loan, you’ll first want to be sure that refinancing is the right choice for you, by taking a look at your current loan terms and payoff period. If you find the terms of your loan confusing, don’t worry—you can always stop by your local branch office to have a chat with a lender and see if refinancing makes sense and what the benefits for you might be.


You’ll also want to make sure that your car loan isn’t “under water,” which can make it difficult to refinance. When a loan is under water, that means that the current value of the vehicle is less than what you owe on the loan. To determine the loan-to-value ratio, follow this simple advice from Business Insider: “Start by taking a look at your last auto loan bill to see how much you still owe. Then, use an online tool like Kelley Blue Book or Edmunds to estimate your car's fair market value.”


Lastly, before you apply for any loan, it’s a good idea to familiarize yourself with your credit score and report to look for red flags, mistakes, or anything else that might prevent you from getting a loan. The FTC (Federal Trade Commission) has this useful guide to requesting and reading your credit report.

Documents You’ll Need

Having the appropriate documents ready will help make the refinancing process quick and easy. Review our list below to get prepared!

When you’re ready to apply, you’ll need to collect certain documents for your lender to verify your identity and income, as well as information about the original loan. And because you won’t be refinancing through the dealership directly, you’ll also need to provide the information about your vehicle. The basic documentation you’ll need includes your:


  • Social Security number
  • Driver’s license
  • Recent pay stubs
  • Most recent tax forms (last 2 to 3 years, to determine the stability of your income)
  • Vehicle documentation: title, registration, insurance info, VIN, and current mileage
  • Current loan information: contracts and other documents relating to your current loan


Your new loan agent can work with you to determine exactly what you need to apply, but it’s a good idea to gather these documents together beforehand to make the application go more smoothly.

Application and Approval

Applying and getting pre-approved is a step that First Bankers Trust can help you with. The experts on our team will help answer any of your questions so you can get started!

You will apply for your loan online or in person, supplying the documents to your lender as needed. The first step will be pre-approval, after which you will be given the possible terms of the loan if you are found to qualify. As Experian explains, “The rate offer from a bank or credit union will be the true interest rate and doesn't include any markup, which can happen when you work with a dealer.” At First Bankers Trust Company, you can apply for a pre-approval through our Auto Loans site, or visit a branch office to submit your application.


If you like the terms you are offered, you can then apply for the loan. Once you receive your approval for the loan, your lender will pay off your old loan and you will begin making your payments to the new lender at your new monthly rate.

Ready to Refinance?

Refinancing your existing auto loan could save you money both month-to-month and over the course of your loan, especially if you are able to take advantage of lower interest rates. And unlike a mortgage, auto loan refinancing can be fairly straightforward, often with a faster approval process. However, as with any loan, borrowers may have questions about how to apply and how they can benefit from refinancing. Here at First Bankers Trust Company, we are happy to help you through the process!


Serving our communities since 1946, First Bankers Trust Company has lived by the motto that customers are always FIRST. We strive to be the best bank for auto loans in West Central Illinois by meeting and exceeding our customers’ needs. With an auto loan from First Bankers Trust, refinancing your vehicle can be quick and easy. Give us a call or stop in at one of our branch locations to see how we can help you refinance your loan!