Refinancing rates depend on your credit score, the age and mileage of your vehicle, how much you still owe, and current market conditions
When you refinance an auto loan, you are replacing your existing loan with a new one from a different lender. The interest rate on that new loan is not set by your old lender — it is determined by the new lender based on how risky they think lending to you is. A lender with a 750 credit score will see a different rate than a lender with a 620 score, even if both are refinancing the same car on the same day.
The rate you receive is also shaped by factors beyond your control: whether the Federal Reserve has raised or lowered rates recently, whether used car prices are rising or falling, and how much competition exists among lenders in your area. This means the rate you see advertised online may not be the rate you actually receive, and rates can shift between the day you start the process and the day you close.
Key Takeaways
- Your credit score is the single largest factor in the rate you receive; a 50-point improvement can lower your rate by 0.5 to 1 percentage point.
- Lenders also look at the vehicle's age, mileage, and current market value, and will not refinance a car worth less than what you owe on it.
- Rates vary significantly between lenders, so getting quotes from at least three sources (banks, credit unions, online lenders) shows you the real range available to you.
- The Federal Reserve's interest rate decisions affect the baseline rate all lenders work from, so refinancing is usually cheaper when the Fed has paused rate increases.
- A hard credit inquiry happens when you get a rate quote, but multiple inquiries within 14 days typically count as one inquiry for credit scoring purposes.
How lenders calculate the rate they offer you
A lender starts with a baseline rate — the cost they pay to borrow money themselves, which moves with Federal Reserve decisions. Then they add a markup based on how likely they think you are to repay. That markup is built from your credit score, payment history, debt-to-income ratio, and the vehicle itself.
Your credit score is the heaviest weight. Lenders use FICO Auto Score, which is different from the FICO score you see on credit monitoring sites. It weights recent payment history and the number of recent inquiries more heavily than the general FICO score does. A score above 740 typically unlocks the best rates; a score below 620 may mean you cannot refinance at all, or only through a subprime lender charging 8 to 12 percent or higher.
The vehicle itself matters because it is the collateral backing the loan. Lenders pull the vehicle history report (CARFAX or AutoCheck) and check the current market value using resources like NADA Guides or Manheim. If you owe $15,000 on a car worth $12,000, most lenders will decline to refinance you because they would lose money if you stopped paying and they had to repossess and sell the car. This situation is called being "underwater" on the loan.
Why rates vary so much between lenders
Banks, credit unions, and online lenders all use different risk models and have different cost structures. A credit union may offer a lower rate to its members because it is a non-profit and does not have to generate returns for shareholders. An online lender may offer a competitive rate because it has lower overhead than a brick-and-mortar bank. A traditional bank may price higher because it is targeting customers who value convenience and service over the lowest rate.
Lenders also have different appetites for risk. Some specialize in borrowers with lower credit scores and price accordingly. Others only want borrowers with scores above 700 and offer rates only to that segment. A rate that seems high to you might be the best available if your credit is below 650, or it might be 2 percentage points higher than what you could get elsewhere if your score is 750.
This is why getting quotes from multiple lenders is not optional — it is the only way to know whether a rate is actually competitive. A quote from your current bank alone tells you nothing about what credit unions or online lenders would offer.
What happens to rates when the Federal Reserve changes policy
The Federal Reserve does not set auto loan rates directly. Instead, it sets the federal funds rate, which is the interest rate banks charge each other for overnight loans. When the Fed raises this rate, banks' cost of borrowing goes up, and they pass that cost along by raising the rates they offer to consumers. When the Fed pauses or cuts rates, the opposite happens.
The lag between a Fed decision and a change in auto loan rates is usually one to three months. If the Fed raises rates in March, you will likely see auto loan rates start climbing in April or May. This means refinancing is usually cheaper during periods when the Fed has paused rate increases, and more expensive during periods of active rate hikes.
You can track Fed decisions through the Federal Reserve's official website or financial news outlets. The Fed meets eight times per year and announces decisions on specific dates. If you are considering refinancing, checking whether the Fed is in a hiking cycle or a pause can help you time the decision.
How your credit score affects the rate you receive
A 50-point improvement in your credit score can lower your rate by 0.5 to 1 percentage point, depending on the lender and the baseline rate environment. On a $20,000 loan over 60 months, a 1 percentage point difference means paying roughly $1,000 more or less over the life of the loan.
Your credit score can improve by paying down other debts, making all payments on time for several months, and correcting errors on your credit report. You can order a free credit report from each of the three bureaus (Equifax, Experian, TransUnion) once per year at annualcreditreport.com. If you find errors — a late payment you did not make, an account that is not yours, a balance reported incorrectly — you can dispute them directly with the bureau.
If your score is currently low, waiting three to six months while you improve it may result in a better rate than refinancing when ready. Use an online calculator to estimate whether the rate savings would outweigh the cost of waiting.
The difference between rate shopping and hard inquiries
When you request a rate quote, the lender performs a hard inquiry on your credit report. A hard inquiry lowers your credit score by a few points and stays on your report for two years. However, the credit scoring system recognizes that you are rate shopping, not taking out multiple loans. All hard inquiries for auto loans within a 14-day window typically count as a single inquiry for scoring purposes.
This means you can safely get quotes from three, four, or even five lenders within two weeks without multiplying the damage to your score. After 14 days, each new inquiry counts separately. If you are serious about refinancing, gather all your quotes within a two-week window, then compare them side by side.
Some lenders offer "soft" inquiries or rate quotes that do not hit your credit report. These are usually estimates only and may not reflect the actual rate you receive after a full process. Use soft quotes to narrow down which lenders to approach, then request hard quotes from your top two or three choices.
When refinancing makes financial sense
Refinancing saves money only if the new rate is lower than your current rate and you keep the car long enough to recoup the closing costs. Most auto refinances have closing costs between $0 and $500, depending on the lender and your state. If you are dropping from 7 percent to 5 percent on a $20,000 loan, you will recoup $300 in closing costs in roughly four months of payments.
The longer your remaining loan term, the more you save by refinancing to a lower rate. If you have only six months left on your current loan, refinancing may not be worth it even if the new rate is lower. If you have three years left, refinancing to a rate 1 to 2 percentage points lower almost always makes sense.
Use an online refinance calculator to estimate your monthly savings and payoff date under the new loan. Compare that to your current loan terms. If the new loan extends your payoff date significantly (for example, from 36 months to 60 months), you may pay more interest overall even if your monthly payment drops.
Frequently Asked Questions
Will getting a refinance quote hurt my credit score?
A single hard inquiry lowers your score by a few points temporarily. Multiple inquiries within 14 days count as one inquiry. After 14 days, each new inquiry counts separately. The impact fades within a few months as long as you do not take on new debt.
Can I refinance a car I still owe more on than it is worth?
Most lenders will not refinance if you are underwater on the loan. Some credit unions and specialized lenders will, but they charge higher rates to offset the risk. You can check your car's value using NADA Guides or Kelley Blue Book and compare it to what you still owe.
How long does a refinance take from start to finish?
Most refinances close within 5 to 10 business days after you submit your process. Some online lenders can close in 2 to 3 days. Your current lender will be paid off automatically, and your new lender will send you new loan documents and a payment coupon or online portal.
Do I need to tell my current lender I am refinancing?
No. Your new lender handles paying off the old loan as part of the refinance process. You do not need permission from your current lender. You should continue making payments to your current lender until the refinance closes and you receive confirmation that the loan has been paid off.
What if I have a very old car — can I still refinance?
Most lenders have age and mileage limits. Many will not refinance cars older than 10 years or with more than 150,000 miles. Some credit unions and online lenders are more flexible. Contact lenders directly to ask about their vehicle requirements before explore.