Last Updated on May 27, 2023 by Anjali Chourasiya

Has it ever happened that you took a car loan at a particular rate of interest, later saw another financial institution offering a car loan at a better rate, and regretted your earlier decision? You would be glad to know that there is something you can do to alter the situation. It is called refinancing. Read on to find out about what refinance car loans means, eligibility criteria, pros, cons, and more. 

What does it mean to refinance a car loan?

Refinancing a car loan refers to switching out of an existing car loan with another car loan, typically from a different financial institution. The main purpose of refinancing a car loan is to gain better repayment terms with regard to interest rates, EMIs, duration of loan repayment, and so on. As a result, you can decrease the monthly payments and free up cash for other financial obligations.

Refinance car loan is also known as a car loan top-up. But what are the reasons you can get refinancing on your car loan? Let’s explore.

When should you refinance a car loan?

  • Lower interest rates

Suppose another bank/NBFC is offering a loan option at a lower interest rate. In that case, you may want to consider switching over to the new option so as to reduce the overall payable interest amount. But in order to get the new loan, you need to pay off your current loan. Further, you should make sure that the prepayment penalty charged for your old loan is lower than the new benefits you will receive with refinancing. 

If your credit score has improved since the time you took the loan, there is a chance that you will be charged a lower interest rate or at least have better repayment terms in general.

  • Change in income

If there is a change in your monthly income, you may want to refinance your loan in such a way that the EMI payments align with your income. For instance, if your income has increased from Rs. 1 lakh to Rs. 1.5 lakh, you may want to increase your EMI payment proportionally so as to be able to pay off the loan faster. In this case, refinancing can be considered.

  • Loan duration

Auto loan refinancing allows you to change your loan duration, either making it longer or shorter. This can help lower your monthly payments. However, it is important to note that changing the duration may affect the total amount you pay, including interest.

  • Modify the co-signer agreement

By refinancing your car loan, you get an option to add/remove a co-signer. If your current co-signer no longer wants to be responsible for your loan repayment, you can remove their obligation by refinancing a new loan from a different lender. 

  • Change in terms

When you initially applied for your current loan, you may not have been completely satisfied with the terms offered. However, you might have accepted it because it was slightly better than other options. But in case you come across a more desirable auto loan with improved terms regarding late fees, insurance, application charges, and other factors, you can choose to refinance and enjoy these better features.

When not to refinance a car loan?

Given this, it is also important to note the situations where you should not refinance your car loan. They are as follows:

  • When most of the loan has been paid off, refinancing a loan when you are close to fully paying it off does not make sense because your payable interest does not reduce considerably; besides, you have to pay refinancing fees. Your costs may exceed your benefits.
  • Refinancing may negatively affect your credit score. Hence, if you plan to apply for a new loan or credit card, it is best not to refinance your car loan.

Eligibility criteria to refinance a car loan

Though the final eligibility depends on the overall profile and creditworthiness of the individual, here are some basic eligibility guidelines for salaried employees and self-employed individuals.

For salaried employees:

  • Individuals who are a minimum of 21 yrs of age at the time of applying for the loan and no older than 60 at the end of the loan tenure.
  • Individuals who have had a job for at least 2 yrs, with a minimum of 1 yr with the current employer.
  • Those who earn a minimum of  Rs. 2,50,000 per year, including the income of the spouse.

For self-employed individuals:

  • Individuals who are a minimum of 25 yrs of age at the time of applying for the loan and no older than 60 at the end of the loan tenure.
  • Individuals who have been in business for a minimum of 2 yrs.
  • Those who earn a minimum of Rs. 2,50,000 per year.

Documents required to refinance car loan

Below-listed documents are required to refinance a car loan:

Photo Identity ProofVoter ID
Aadhaar Card
Driving License
Age ProofVoter ID
Driving License
Aadhaar Card
Birth Certificate
Secondary School Leaving Certificate
Pension Payment Order or Receipt
LIC Policy
Address ProofRent Agreement
Bank Statement
Ration card
Driving License
Electricity Bill
Property Tax Receipt
Water Bill
Telephone Bill
Credit Card Bill
Income Proof3 Months Salary Statement
6 Months Bank Statement
Income TaxForm 16
Employment ProofEmployers Letter
Identification Card
Valuation / Cost Estimation Report from Evaluator Approved by the NBFC or Bank
Car Ownership Papers

Note that in the case of self-employed individuals, six months’ bank statements can be used as income proof.

Pros of refinancing a car loan

The following are the advantages of refinancing a car loan:

Lower payable interest in the long term

As mentioned above, you might be able to pay lower interest if there is a fall in the interest rate or if there is a change in your credit score. Similarly, if you change the repayment terms in such a way that you are paying higher EMIs, the interest paid goes down then too. All of this is possible through refinancing.

Favourable loan terms 

You may have settled with your earlier loan due to a need for more options. However, with refinancing, you will be able to change a number of things like loan tenure, co-signer details, terms related to late fees, insurance, application charges, hypothecation, and so on. 

Reduced monthly payments

With the help of refinancing your car loan, you can lower your monthly payments, making it more manageable for your budget.

Improved cash flow

With lower monthly payments, you have more disposable income, which can be used for other financial goals or expenses.

Better loan terms

Refinancing gives you an opportunity to negotiate better loan terms, such as reduced fees, flexible repayment options, or improved customer service.

Removal or addition of co-signer

Refinancing allows you to remove a co-signer from your loan if they no longer wish to be responsible for repayment. Conversely, you can also add a co-signer to strengthen your loan application and potentially secure better terms.

Cons of refinancing a car loan

Following are some of the demerits of refinancing a car loan.

Difficulty in refinancing loans for an old car

If your car is relatively older, its value must have depreciated considerably. For such cars, it is hard to find entities that are willing to refinance. Different lenders have different terms, so shopping around before finalising a lender is a good idea.

High charges

In order to refinance your loan, you will have to pay a penalty of about 1-3% to your initial lender. Apart from this, there are a number of other fees like processing fees, refinancing fees, and so on. Some institutions may not be transparent about these charges. So, it is your responsibility to make sure that you negotiate these fees and find a good deal. Great care must be taken so that your costs do not exceed your benefits during the process of refinancing.

Affect on credit score

Refinancing a loan affects your credit score negatively. It involves applying for a new loan, which can temporarily lower your credit score due to the credit inquiry. If you are going to take a loan or credit card in the near future, refinancing may negatively impact the terms of payment of your new loan. However, consistently making timely payments on the new loan can help improve your credit score over time.

Longer loan term

Extending the loan tenure through refinancing may result in paying more interest over time, even with lower monthly payments. It can increase the chances that your car will depreciate below what you currently owe.

Eligibility requirements

To qualify for refinancing, you need to meet the lender’s eligibility criteria, which may include a good credit score, income verification, and other financial factors. Failing to meet these requirements could result in not being approved for refinancing.

Limited savings potential

Depending on the difference in interest rates and the remaining loan term, the potential savings from refinancing may not be significant enough to justify the associated costs and efforts.

How to refinance your car loan?

Once you have ensured that you satisfy all the eligibility requirements and have the necessary documents for the process of refinancing, you can apply for an auto-refinance loan with an institution of your choice. Further, making sure you do not have any defaults with the previous lender is a step that you shouldn’t miss.

However, caution must be exercised while choosing a refinancer. There are many options available in the market. So, conduct proper research before you arrive at a decision. Also, make sure to negotiate the fees and other details in your favour. A lower interest rate is one of many metrics you should be looking for. Ensure that the refinancer is trustworthy and that you do not end up incurring more losses than the benefits you gain from the refinancing.


Owning a car is the dream of every man. Loans are an excellent option for the same. However, a lot of factors and numbers come into play when availing of a car loan. You can opt for refinancing your car loan if the current terms and conditions do not satisfy you. Refinancing allows you to alter payment tenure and interest rates, provided you negotiate the deal in your favour. There are several options available in the market for refinancing. Be sure to properly research and examine your options and choose the best one for you.


How long until you can refinance a car loan?

After purchasing your car, you generally need to wait for at least 60-90 days to refinance. This allows time for the car title to be transferred to your name, a requirement for refinancing. Moreover, when you have two years or more remaining on your car loan, refinancing can offer maximum benefits. However, it’s important to consider factors such as the remaining loan balance, the age of the car, and its condition and mileage.

How many times can you refinance a car loan?

There is no legal restriction on how many times you can refinance your car. If you have previously refinanced your car and are able to find a lender willing to help you, you can refinance again.
Anjali Chourasiya
Inline Feedbacks
View all comments

The blog posts/articles on our platform are purely the author’s personal opinion and do not necessarily represent the views of Anchorage Technologies Private Limited (ATPL) or any of its associates. The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, please consult a professional financial or tax advisor. The content on our platform may include opinions, analysis, or commentary, which are subject to change, without notice, based on market conditions or other factors. Further, the use of any third-party websites or services linked on the website is at the user's discretion and risk. ATPL is not responsible for the content, accuracy, or security of external sites. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. The examples and/or securities quoted (if any) are for illustration only and are not recommendatory. Any reliance you place on such information is strictly at your own risk. In no event will ATPL be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this website.

By accessing this platform and its blog section, you acknowledge and agree to the Terms and Conditions of this website, Privacy Policy and Disclaimer.