What happens when you refinance an auto loan
Refinancing an auto loan means taking out a new loan to pay off your existing car loan. The new lender pays off the old loan in full, and you then make monthly payments to the new lender instead. The main reason people refinance is to get a lower interest rate, which reduces the total amount you pay over the life of the loan.
Your new rate depends on your credit score, the age and mileage of your vehicle, how much you still owe, and current market rates. If your credit has improved since you took out the original loan, or if interest rates have dropped, refinancing can save you money. The process typically takes one to two weeks from process to funding.
Key Takeaways
- Refinancing replaces your current auto loan with a new one, usually at a different interest rate and with a different lender.
- Your new rate depends on your credit score, the vehicle's age and condition, how much you owe, and what rates lenders are currently offering.
- You can refinance through banks, credit unions, online lenders, and sometimes your current lender, each with different rate ranges and approval timelines.
- Refinancing makes the most financial sense if your new rate is at least one percentage point lower than your current rate, or if you need to lower your monthly payment.
- The vehicle must have a lien-free title or the new lender must agree to hold the title until the loan is paid off.
How your credit score affects the rate you receive
Lenders use your credit score as the primary factor in setting your interest rate. A higher score gets you a lower rate; a lower score gets you a higher rate. Most auto refinance lenders look for a score of 620 or above, though some will work with scores as low as 580. The difference between a 650 score and a 750 score can be one to three percentage points on your rate.
If your credit has improved since you took out your original loan — through paying bills on time, reducing credit card balances, or disputing errors on your report — you may now may have access to for a better rate. You can check your credit score for free through AnnualCreditReport.com, which is the only federally authorized source for free credit reports. Knowing your score before you shop for refinancing rates helps you understand what range to expect.
Where to get refinance rate quotes
You have several options for where to refinance. Banks, credit unions, and online lenders all offer auto refinancing. Credit unions often have lower rates than banks if you are a member, and some credit unions allow you to join based on where you work or live. Online lenders typically have faster approval and funding timelines — sometimes as quick as one business day — but their rates vary widely based on your credit profile.
You can also ask your current lender whether they offer refinancing. Some do, and it may be faster since they already have your information. Getting quotes from at least three different lenders lets you compare rates and terms. Most lenders will give you a rate quote without a hard credit inquiry, which means it does not affect your credit score. Once you decide to move forward, the lender will do a hard inquiry, which does show up on your credit report but the impact is temporary.
What vehicle age and mileage mean for your rate
Lenders care about the age and mileage of your car because older, higher-mileage vehicles are riskier to lend against. Most lenders will refinance vehicles up to 10 years old, though some go to 12 years. Mileage limits vary, but many lenders cap out at 120,000 to 150,000 miles. If your vehicle is older or has higher mileage, you may face a higher rate or be turned down by some lenders.
The vehicle's current market value also matters. Lenders want to make sure the loan amount does not exceed what the car is worth. If you owe more than the car is worth — called being "upside down" — some lenders will still refinance you, but at a higher rate or with a higher down payment. You can check your car's estimated value on Kelley Blue Book or NADA Guides to understand where you stand.
How much you owe and how long you have left
The amount you still owe on your loan affects both whether you can refinance and what rate you get. Most lenders want you to owe at least $5,000, though some will go lower. If you have only a few months left on your loan, refinancing may not be worth the cost and effort — you would be paying closing costs and fees to save money for a short period.
The remaining term of your loan also influences your new rate. If you refinance into a longer loan term, your monthly payment drops but you pay more interest overall. If you refinance into a shorter term, your payment rises but you pay off the car faster and pay less total interest. Some people refinance to lower their payment when money is tight, while others refinance to shorten the loan and save on interest.
Current market rates and economic factors
Auto loan rates change based on the Federal Reserve's interest rate decisions, inflation, and overall economic conditions. When the Fed raises its benchmark rate, auto loan rates typically rise. When the Fed cuts rates, auto loan rates usually fall. Rates also vary by lender — a credit union might offer 5.5 percent while an online lender offers 6.2 percent for the same borrower.
You can track general rate trends through financial news sources and lender websites, but the only rate that matters is the one you are actually offered. That rate is based on your specific credit profile, vehicle, and loan amount. Shopping around is the only way to know what rates are available to you right now.
When refinancing makes financial sense
Refinancing is worth considering if your new rate would be at least one percentage point lower than your current rate. The larger the rate drop, the more money you save. If you currently have a 7 percent rate and can refinance at 5.5 percent, the savings are significant. If you can only drop from 6 percent to 5.8 percent, the savings may not justify the time and any fees involved.
Refinancing also makes sense if you need to lower your monthly payment because your financial situation has changed. Extending your loan term lowers the payment, though you will pay more interest overall. Some people refinance when they are facing a temporary cash flow problem, then refinance again later when their situation improves.
Documents and information you will need
To get a refinance quote, have your current loan documents handy. You will need your loan account number, the current payoff amount, your vehicle's VIN (Vehicle Identification Number), the current mileage, and the year, make, and model of the car. You will also need your Social Security number, current income, and employment information.
Once you choose a lender and move forward, you will need to provide proof of insurance and a copy of your driver's license. The new lender will order a title search to confirm the lien holder and may support the title can be transferred. The process moves faster if you have all these documents ready before you start.
Frequently Asked Questions
Can I refinance if I am still paying off my original loan?
Yes. You refinance while the original loan is still active. The new lender pays off the old loan in full, and you start making payments to the new lender. There is no waiting period — you can refinance as soon as you want, though most lenders prefer you to have made at least a few payments on the original loan first.
Will refinancing hurt my credit score?
A hard credit inquiry will lower your score by a few points temporarily. However, the impact is small and fades within a few months. Shopping for rates within a short window — typically 14 to 45 days, depending on the scoring model — counts as a single inquiry, so getting multiple quotes does not multiply the damage.
What if I owe more than my car is worth?
Some lenders will refinance you even if you are upside down, but you may face a higher rate or be asked to put money down to cover the difference. Other lenders will decline. Shopping around is important in this situation because terms vary widely between lenders.
How long does refinancing take from start to finish?
Most lenders fund a refinance within one to two weeks of approval. Online lenders are often faster — sometimes funding within one business day. Your current lender will receive the payoff funds and close your old loan. You should see the new loan show up on your credit report within 30 to 60 days.
Can I refinance with the same lender I borrowed from originally?
Yes, many lenders offer refinancing to existing customers. They may process it faster since they already have your information and payment history. However, you should still shop around, because your original lender does not always offer the best rate.