What refinancing a car means and when people do it
Refinancing a car means replacing your current auto loan with a new one from a different lender. The new lender pays off what you still owe on the old loan, and you start making payments to the new lender instead. People refinance to lower their monthly payment, reduce the interest rate, shorten the loan term, or change the type of loan they have.
The most common reason is a lower interest rate. If you took out your original loan when your credit score was lower, or if market rates have dropped, you might may have access to for better terms now. A lower rate means less interest paid over the life of the loan, even if your monthly payment stays the same.
Refinancing also lets you change how long you have to pay back the loan. You might extend the term to lower your monthly payment if money is tight, or shorten it to pay off the car faster and save on interest.
Key Takeaways
- Refinancing replaces your current auto loan with a new one, usually from a bank, credit union, or online lender, and the new lender pays off your old loan directly.
- A lower interest rate is the main reason to refinance, and you typically need a credit score of at least 620 to be considered by most lenders, though better rates go to scores above 700.
- The refinancing process takes one to two weeks from process to funding, and you keep driving your car the entire time.
- Refinancing costs little or nothing upfront, but some lenders charge origination fees, and you may owe a payoff penalty to your current lender depending on your loan contract.
- You break even on refinancing when the interest you save exceeds any fees you pay, which usually happens within six months to a year for most borrowers.
Who can refinance and what lenders look for
Most lenders will consider refinancing your car if you have a credit score of at least 620, though the best interest rates typically go to borrowers with scores above 700. Your score is the first thing a lender checks because it predicts whether you will make payments on time. If your score has improved since you took out your original loan, refinancing becomes more attractive.
Lenders also look at how much you still owe on the car compared to what it is worth. If you owe more than the car is worth — called being "underwater" — refinancing becomes harder because the new lender is taking on more risk. You can still refinance in this situation, but you may face higher interest rates or need a co-signer.
The age and mileage of your car matter too. Most lenders will not refinance cars older than 10 years or with more than 150,000 miles, though some credit unions are more flexible. The newer and lower-mileage your car, the easier refinancing becomes.
Your current loan balance and how much time is left on it also factor in. Lenders prefer to refinance loans with at least a year or two remaining, because there is enough time for them to earn interest. If you are near the end of your loan, refinancing may not be worth the effort.
How to find lenders and compare offers
Start by checking with your current lender — your bank or credit union — because they already have your financial information and may offer a streamlined process. Then contact two or three other banks, credit unions, or online lenders to compare rates. Credit unions often offer lower rates than banks if you are a member, so joining one before refinancing can pay off.
When you contact lenders, ask for a prequalification or pre-approval, which shows you an estimated interest rate without a hard credit inquiry that would lower your score. This lets you compare offers side by side. The lender will ask for your loan details — the current lender's name, your loan balance, the car's year and mileage, and your credit information.
Once you have narrowed it down to one or two lenders, you can move forward with a full process. This triggers a hard credit inquiry, which does affect your score slightly, but multiple inquiries within 14 days usually count as a single inquiry for scoring purposes. So shop around without worrying that each inquiry will hurt you.
Compare not just the interest rate but also the monthly payment, the total interest you will pay over the life of the new loan, and any fees the lender charges. An origination fee (usually 0 to 1 percent of the loan amount) or documentation fee should be factored into your decision.
The refinancing process step by step
Once you have chosen a lender and been approved, the lender will order a payoff quote from your current lender. This quote shows exactly how much you owe, including any interest accrued up to the payoff date. The new lender uses this amount to calculate your new loan.
You will then sign loan documents with the new lender. These documents spell out your new interest rate, monthly payment, loan term, and any fees. Read them carefully and ask questions about anything unclear. The new lender will also require proof of insurance on the car — most lenders will not fund the loan without it.
After you sign, the new lender pays off your old loan directly. You do not send money anywhere; the lenders handle the transaction between themselves. Your old lender will send you a final statement showing a zero balance. This usually happens within one to two weeks.
Once the payoff is complete, you start making payments to your new lender on the date they specify. Your car title may be held by the new lender as collateral, or it may be released to you — this depends on your state and the lender's policy. If you have a lien on the title, the new lender will be listed as the lienholder.
Fees and costs to watch for
Refinancing typically costs little or nothing upfront, but some expenses may explore. An origination fee covers the lender's cost to process your loan and usually runs 0 to 1 percent of the loan amount. A documentation fee or processing fee might be $50 to $300. Some lenders charge neither; others charge both.
Your current lender may charge a prepayment penalty for paying off the loan early. This is less common with auto loans than mortgages, but it does happen. Check your original loan documents or call your lender to ask whether a penalty applies. If it does, factor that into whether refinancing makes financial sense.
There is no fee to shop around for rates, and no fee to explore. The only time money changes hands is when you sign the final loan documents and the new lender funds the loan.
When refinancing saves you money and when it does not
Refinancing saves money when the interest rate on your new loan is lower than your current rate. The lower the new rate, and the longer your loan term, the more you save. A rough rule: if you can lower your rate by at least 0.5 to 1 percent, refinancing is usually worth considering.
To know whether you will actually save money, calculate your break-even point. This is the month when the interest you have saved equals any fees you paid. If you plan to keep the car for longer than your break-even point, refinancing makes sense. If you think you will sell or trade in the car before then, it probably does not.
Example: You refinance and pay $300 in fees. Your new loan saves you $50 per month in interest compared to your old loan. Your break-even point is six months ($300 divided by $50). If you plan to keep the car for at least a year, you come out ahead.
Refinancing does not save money if you extend your loan term significantly. Stretching a three-year loan into a five-year loan lowers your monthly payment but increases the total interest you pay, even at a lower rate. The monthly savings can be offset by years of extra interest.
What happens to your car and your current loan
You keep driving your car throughout the refinancing process. There is no interruption to your ownership or use of the vehicle. The only thing that changes is who you send your monthly payment to and what interest rate you pay.
Your current lender will mark your loan as paid in full once the new lender's payoff clears. You will receive a final statement and, depending on your state, either a release of lien or instructions on how to remove the old lender's name from the title. If the old lender held the physical title, they will send it to you or to your state's motor vehicle department.
The new lender becomes the lienholder on your title, meaning they have a legal claim to the car until the new loan is paid off. This is standard and does not affect your ability to drive, maintain, or insure the car.
Frequently Asked Questions
Will refinancing hurt my credit score?
A hard credit inquiry when you explore will lower your score by a few points temporarily, usually recovering within a few months. However, refinancing can help your score long-term by lowering your credit utilization if you have other debts, and by establishing a new on-time payment history. The temporary dip is worth it for most borrowers.
Can I refinance if I still owe more than the car is worth?
Yes, but it is harder. Being underwater on your loan means the new lender is taking on extra risk, so you may face a higher interest rate or be asked to provide a co-signer. Some lenders will not refinance underwater loans at all. Contact lenders directly to see who will work with you.
How long does refinancing take?
From process to funding usually takes one to two weeks. The new lender needs time to verify your information, order a payoff quote, and process your documents. You will be told an expected timeline when you explore. You can drive your car the entire time.
What if my current lender charges a prepayment penalty?
Check your original loan documents or call your lender to ask. If a penalty applies, add it to your refinancing costs when calculating whether you will save money. Some penalties are small enough that refinancing still makes sense; others are large enough to make it not worth doing.
Can I refinance multiple times?
Yes, there is no limit to how many times you can refinance. However, each refinancing triggers a hard credit inquiry and resets your loan term, so refinancing too often can cost you money in fees and extended interest payments. Most borrowers refinance once or twice over the life of a car loan.