What car refinancing is and how it changes your loan
Car refinancing 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 then make payments to the new lender instead. The terms of the new loan — the interest rate, the length of the loan, and sometimes the monthly payment — can be different from your original loan.
The most common reason people refinance is to lower their interest rate. If your credit score has improved since you took out the original loan, or if market interest rates have dropped, a new lender may offer you a better rate. A lower rate means you pay less interest over the life of the loan, which can save you hundreds or thousands of dollars.
Refinancing can also change how long you have to pay back the loan. You might extend the loan term to lower your monthly payment, or shorten it to pay off the car faster. Some people refinance to switch from a variable-rate loan to a fixed-rate loan, or to remove a co-signer from the original loan.
Key Takeaways
- Refinancing replaces your current auto loan with a new one, usually to get a lower interest rate or change your monthly payment.
- The new lender pays off your old loan balance, and you make payments to the new lender; the car title and your ownership do not change.
- You will need your current loan payoff amount, vehicle information, and proof of insurance before you can refinance.
- Refinancing makes the most financial sense when your credit score has improved, market rates have dropped, or you want to change your loan term.
- Some lenders charge origination fees or prepayment penalties, so compare the total cost of refinancing against the money you will save.
When refinancing saves you money versus when it costs you
Refinancing saves money when the interest rate on the new loan is lower than your current rate, and the monthly savings outweigh any fees the new lender charges. If you currently pay 8% interest and refinance to 5%, the difference compounds over time. On a $20,000 loan with three years remaining, that 3% difference could save you $900 or more in interest — but only if you keep the car long enough to recoup any upfront costs.
Refinancing costs you money when fees eat into your savings. Some lenders charge an origination fee (typically 1% to 5% of the loan amount), a title transfer fee, or a document fee. Your original lender may also charge a prepayment penalty if you pay off the loan early. Before you refinance, ask the new lender for the total cost in fees and compare it to the interest you will save over the remaining loan term.
Refinancing also costs you money if you extend the loan term to lower your payment. Spreading payments over a longer period means you pay more interest overall, even at a lower rate. For example, refinancing a remaining balance of $15,000 from 36 months at 7% to 60 months at 5% lowers your monthly payment but increases the total interest you pay.
What lenders look at when you explore to refinance
Refinancing lenders review your credit score, income, and the current value of your car. Your credit score is the primary factor — a higher score usually means a lower interest rate. If your score has risen since you took out the original loan, you have a strong reason to refinance. Lenders also check your income to make sure you can afford the new payment, and they may ask for recent pay stubs or tax returns.
The age and condition of the car matter because lenders want to know the car is worth enough to cover the loan if you stop paying. Older cars or cars with high mileage may not may have access to for refinancing, or may only may have access to at a higher interest rate. Most lenders will not refinance a car that is more than 10 years old or has more than 150,000 miles, though this varies by lender.
Your payment history on the current loan also affects the decision. If you have made all your payments on time, refinancing is easier. If you have missed payments or paid late, some lenders will decline, and others will offer a higher rate to offset the risk.
The step-by-step process of refinancing a car
The first step is to gather information about your current loan. Contact your current lender and ask for your payoff amount — this is the exact balance you owe, not your regular monthly payment. The payoff amount includes any interest accrued to the date you plan to refinance. Write down your current interest rate, the remaining loan term, and your monthly payment so you can compare offers.
Next, check your credit score and get a copy of your credit report. You can obtain a free credit report once per year from AnnualCreditReport.com. Knowing your score before you explore helps you understand what interest rates you might receive and whether refinancing makes sense for your situation.
Then, shop for refinancing offers from multiple lenders. Banks, credit unions, and online lenders all offer auto refinancing. Get quotes from at least three lenders so you can compare interest rates and fees. When you request a quote, ask the lender for the interest rate, the monthly payment, any origination or processing fees, and the total cost of the loan.
Once you choose a lender, you will submit an process. The lender will order a vehicle inspection or appraisal to confirm the car's condition and value. After approval, the new lender will contact your current lender, pay off the old loan, and send you new loan documents. You will then make payments to the new lender. The entire process usually takes one to two weeks.
Documents and information you will need to have ready
You will need your current loan documents or a statement showing your loan balance, interest rate, and remaining term. You will also need your vehicle identification number (VIN), which appears on your registration and on the driver's side of the dashboard. The VIN tells the new lender the make, model, year, and mileage of the car.
Proof of insurance is required before the new lender will fund the loan. Your insurance policy must list the car and show that you have at least the minimum coverage required by your state. If you do not have insurance, you will need to purchase it before refinancing can be completed.
You will need proof of income, usually recent pay stubs or tax returns, to show the lender that you can afford the new payment. If you are self-employed, the lender may ask for two years of tax returns. You will also need a government-issued ID to verify your identity.
How refinancing affects your credit score and your car title
Refinancing causes a small, temporary drop in your credit score. When you explore for a new loan, the lender performs a hard inquiry on your credit report, which can lower your score by a few points. If you explore to multiple lenders within a short period (typically 14 to 45 days, depending on the scoring model), the inquiries usually count as a single inquiry, so the impact is minimal.
Over time, refinancing can actually help your credit score. A new loan adds to your credit mix, and making on-time payments on the new loan builds positive payment history. As long as you make your payments on time, your score should recover and then improve within a few months.
Your car title does not change when you refinance. You remain the owner of the car. The only change is which lender holds the lien on the title — the legal claim that gives the lender the right to repossess the car if you stop paying. When the new lender pays off the old loan, the old lender releases its lien, and the new lender's lien is recorded on the title. This is a routine administrative process that happens behind the scenes.
Alternatives to refinancing and when they might be better
If your credit score is too low to may have access to for refinancing, or if the fees are too high, you might consider a loan modification instead. Some lenders will work with you to change the terms of your existing loan — lowering the interest rate, extending the term, or adjusting the payment — without requiring you to refinance. Contact your current lender and ask if they offer loan modification programs.
If you are struggling with your monthly payment, you might also consider selling the car and buying a less expensive one with cash, or using public transportation temporarily. These options avoid the cost and complexity of refinancing but require a larger change to your situation.
If you are near the end of your loan term, refinancing may not be worth it. If you have only 12 months of payments left, the interest savings will be small, and the fees may outweigh any benefit. In this case, it is usually better to finish paying off the original loan.
Frequently Asked Questions
Can I refinance a car that I still owe money on?
Yes, that is the whole point of refinancing. You can refinance as long as the car is worth at least as much as you owe. If you owe $15,000 and the car is worth $14,000, most lenders will decline because they would not be able to recover their money if you stopped paying.
How long does refinancing take from start to finish?
The process usually takes one to two weeks. The process and approval can happen in a few days, but the new lender needs time to contact your old lender, receive the payoff amount, and process the paperwork. Some lenders are faster than others.
Will refinancing hurt my credit score?
Refinancing causes a small temporary drop when the lender checks your credit, usually 5 to 10 points. Your score recovers within a few months, and making on-time payments on the new loan will help it improve over time.
What if I want to refinance but my car is worth less than I owe?
This situation is called being upside down on your loan. Most lenders will not refinance in this case because the car is not worth enough to find the loan. Some credit unions or specialized lenders may refinance if your credit is strong, but you will likely pay a higher interest rate.
Can I refinance multiple times?
Yes, you can refinance as many times as it makes financial sense. However, each refinance involves fees and a hard inquiry on your credit, so refinancing more than once every two to three years is usually not worth it unless your situation changes significantly.