Refinancing a car usually costs money upfront, though the savings over time can outweigh those costs
When you refinance a car loan, you are replacing your current loan with a new one from a different lender. The new lender pays off what you owe on the old loan, and you start making payments to them instead. This process almost always involves fees — some charged by the new lender, some by your state or county, and sometimes by the old lender if your contract includes a prepayment penalty.
The total cost depends on what fees your new lender charges, whether your old loan allows early payoff without penalty, and how much you still owe. Most people refinance because the interest rate on the new loan is lower, which saves them money over the remaining loan term even after paying the upfront costs. But you need to do the math for your specific situation before you commit.
Key Takeaways
- Refinancing fees typically range from $0 to $500, with origination fees (usually 1 to 2 percent of the loan amount) being the most common cost.
- Your old lender may charge a prepayment penalty if your contract includes one, though federal law caps this penalty at 1 percent of the remaining balance for loans under 60 months.
- Your state or county may charge a title transfer fee or registration fee, usually between $50 and $200, depending on where you live.
- A lower interest rate on the new loan can save you hundreds or thousands of dollars over time, but only if the monthly savings exceed the upfront costs within a reasonable timeframe.
- Some lenders advertise no-fee refinancing, but this usually means they roll the fees into the loan balance, so you pay them over time with interest.
Fees charged by the new lender
The new lender will charge an origination fee in most cases. This is a percentage of the loan amount, typically 1 to 2 percent. On a $20,000 loan, that would be $200 to $400. Some lenders charge a flat fee instead — say $300 or $500 — regardless of the loan size. A few lenders advertise zero origination fees, but this is less common for car refinancing than for mortgages or personal loans.
Beyond origination, some lenders charge a processing fee or documentation fee, usually $50 to $150. This covers the cost of reviewing your process and preparing the paperwork. Not all lenders charge this separately; some bundle it into the origination fee or waive it entirely. When you get a quote from a lender, ask for the total cost in writing before you proceed.
A few lenders also charge a credit report fee, typically $10 to $30. This is the cost of pulling your credit to make the lending decision. Again, some lenders waive this or include it in another fee. The key is to ask upfront what the total out-of-pocket cost will be, and whether any fees will be rolled into the loan instead of paid upfront.
Prepayment penalties from your current lender
Your current loan contract may include a prepayment penalty — a fee charged if you pay off the loan early. This is less common in car loans than in mortgages, but it does happen. If your contract includes one, your current lender will charge it when the new lender pays off your old loan. The amount varies by contract, but federal law limits prepayment penalties to 1 percent of the remaining balance for loans with an original term of 60 months or less, and 2 percent for longer loans.
To find out whether your loan has a prepayment penalty, check your loan agreement or call your current lender and ask directly. Many lenders will tell you the exact amount over the phone. If the penalty is high relative to the interest savings you expect from refinancing, it may not be worth it.
State and county fees for title and registration
When you refinance, the new lender becomes the lienholder on your car's title. Your state or county will charge a fee to transfer the title and update the registration. These fees vary widely by location — some states charge as little as $20, while others charge $200 or more. A few states charge based on the car's value rather than a flat fee.
Contact your state's Department of Motor Vehicles or equivalent agency to find out what the fee will be in your case. Some lenders handle the title transfer for you and roll the fee into the loan; others require you to handle it yourself. Ask your new lender what their process is and who pays the fee.
How to calculate whether refinancing makes financial sense
To decide whether refinancing is worth the cost, you need to know three things: the total upfront cost, the monthly payment savings, and how long you plan to keep the car.
Start by getting a quote from a potential new lender. They should tell you the new interest rate, the new monthly payment, and all fees. Subtract the new monthly payment from your current monthly payment to find your monthly savings. Then divide the total upfront cost by the monthly savings to find your break-even point — the number of months it will take for the savings to cover the costs.
For example: if your upfront costs are $400 and your monthly savings are $50, your break-even point is 8 months. If you plan to keep the car for at least 8 months, refinancing makes sense. If you plan to sell or trade it in within 8 months, it probably does not.
No-fee refinancing and what it really means
Some lenders advertise refinancing with no upfront fees. What this usually means is that they roll the fees into the loan balance instead of charging them upfront. You do not pay them out of pocket when ready, but you pay them over time as part of your monthly payments — plus interest on top of the fees.
This can make sense if you do not have cash available for upfront costs. But it means you are paying more in total interest over the life of the loan. Run the numbers both ways: upfront fees versus rolled-in fees. Compare the total amount you will pay under each scenario, not just the monthly payment.
When refinancing costs more than it saves
Refinancing does not always make financial sense. If your current interest rate is already low, the new rate may not be much lower, and the upfront costs may eat up any savings. If you are near the end of your loan term, you may have only a few months of payments left, so the monthly savings will not add up to much.
If your credit score has dropped since you took out the original loan, the new lender may offer a rate that is higher than your current rate. In that case, refinancing would cost you money, not save it. Before you explore, check your credit score and get a rate quote to see what you would actually be offered.
Frequently Asked Questions
Can I refinance a car loan with bad credit?
Yes, but lenders with bad-credit programs typically charge higher interest rates and more fees. You may end up paying more, not less, than you currently do. Check your credit score first and get quotes from multiple lenders to compare rates and fees before deciding.
What if I still owe more than the car is worth?
You can still refinance if you are underwater on the loan, but some lenders will not do it, and those who will may charge a higher rate or require a larger down payment. Ask lenders directly whether they refinance underwater loans before you explore.
How long does refinancing take?
The process typically takes 3 to 7 business days from process to funding. During that time, you continue making payments to your old lender. Once the new lender funds the loan, they pay off the old one, and you start making payments to the new lender.
Do I have to refinance with a bank, or can I use a credit union?
You can refinance through a bank, credit union, online lender, or sometimes even your current lender. Credit unions often charge lower fees and offer better rates to members. If you belong to a credit union, get a quote from them before comparing to banks or online lenders.
What happens to my old loan after refinancing?
The new lender pays it off in full. Your old lender closes the account, and you will no longer owe them anything. You should receive a letter confirming the payoff, and the lien on your title will be released once the new lender records the transfer with your state.