What refinancing actually changes about your loan
Refinancing an auto loan means replacing your current 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 them instead. The terms of the new loan — the interest rate, the monthly payment, and how many months you have to pay — can all be different from your original loan.
The main reason people refinance is to lower their interest rate, which reduces the total amount they pay over the life of the loan. A lower rate also typically means a lower monthly payment, which frees up cash each month. Less commonly, someone refinances to extend the loan term (pay over more months) to lower the monthly payment, or to shorten the term to pay off the car faster.
Refinancing does not change the car itself, the amount you still owe, or who holds the title. It only changes who collects your payments and what interest rate you pay going forward.
Key Takeaways
- Your credit score is the single biggest factor in what interest rate a lender will offer you, so check your score before shopping and dispute any errors.
- You save the most money by refinancing to a lower rate with the same loan term, rather than extending the loan to lower your payment.
- Banks, credit unions, and online lenders all offer auto refinancing, and rates vary significantly between them — getting quotes from at least three is standard.
- The refinance process takes one to two weeks from approval to funding, and you keep driving your car and making payments to your old lender until the new lender pays them off.
- Refinancing makes sense only if the new rate is at least 0.5 to 1 percentage point lower than your current rate, depending on how much you still owe and how long you have left to pay.
Check your credit score and history before you shop
Lenders pull your credit report and score to decide what interest rate to offer you. If your score has improved since you took out the original loan, you may now may have access to for a better rate. If your score has dropped, refinancing may not save you money — or you may not be approved at all.
Before you contact any lender, pull your own credit report from AnnualCreditReport.com, which is the only free source authorized by federal law. Review it for errors: wrong payment history, accounts you did not open, or incorrect balances. Dispute any errors directly with the credit bureau (Equifax, Experian, or TransUnion) listed on the report. Corrections can take 30 days, so start this step early if you find problems.
You can also check your credit score for free through your bank, credit card issuer, or a service like Credit Karma or NerdWallet. The score you see there may differ slightly from what a lender sees, but it gives you a realistic picture of where you stand. Lenders typically look for a score of 620 or higher to refinance, though better rates usually require a score of 700 or above.
Understand what lenders look for beyond your credit score
Your credit score is the biggest factor, but lenders also consider 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 "upside down"), refinancing is harder or impossible. Check your car's value on Kelley Blue Book or NADA Guides using the year, make, model, and mileage.
Lenders also want to see that you have been making your current payments on time. A single late payment in the last year can disqualify you or raise the rate they offer. If you have missed payments, wait until they are at least 12 months old before refinancing.
How much time is left on your loan matters too. Most lenders will not refinance a loan with less than 12 months remaining, because there is not enough time to recover the cost of processing the new loan. If you have fewer than 12 months left, refinancing will not be an option.
Get quotes from at least three different types of lenders
Interest rates vary significantly between lenders, so comparing at least three quotes is standard practice. The three main sources are banks, credit unions, and online lenders.
Banks are the most familiar option. Most large banks (Chase, Bank of America, Wells Fargo) and many regional banks offer auto refinancing. Rates are typically middle-of-the-road, and approval is straightforward if your credit is solid. You can often refinance with your current bank, which simplifies the process.
Credit unions often offer lower rates than banks, especially if you are a member. You do not have to be a member to join most credit unions — you may be may be able to access through your employer, your school, or your location. If you are not currently a member, check whether you can join before you explore. Credit unions typically have slower process processes than banks or online lenders.
Online lenders (LendingClub, Upgrade, Lightstream) often approve applications quickly and fund within days. Rates vary widely, so you still need to compare. Some online lenders specialize in borrowers with lower credit scores, which can be helpful if your score is below 650.
When you request a quote, ask for the interest rate, the monthly payment, the loan term, and any fees (some lenders charge origination fees or prepayment penalties). Most lenders offer a "soft pull" of your credit, which does not affect your score. Hard pulls (which do affect your score slightly) usually happen only after you formally explore.
Calculate whether refinancing actually saves you money
A lower interest rate does not always mean refinancing is worth it. You need to compare the total cost of your current loan to the total cost of the new loan.
Start with your current loan: multiply your monthly payment by the number of months left. That is the total you will pay if you do nothing. Then calculate the total for the new loan: multiply the new monthly payment by the new loan term. Subtract the new total from the current total. That difference is your gross savings.
Now subtract any fees the new lender charges (origination fees, title transfer fees, or other closing costs). The result is your net savings. If the net savings is less than $500, refinancing is usually not worth the effort and the small hit to your credit score from the hard pull. If it is $500 or more, refinancing makes financial sense.
As a rough rule: refinancing saves money only if the new rate is at least 0.5 to 1 percentage point lower than your current rate. The closer you are to paying off the car, the bigger the rate drop needs to be to make it worthwhile.
Complete the refinance process and funding process
Once you choose a lender, you will fill out a formal process. Have these documents ready: your driver's license, proof of insurance, the loan account number from your current lender, and the vehicle identification number (VIN) from your registration or title.
The lender will order a vehicle inspection report (usually done remotely or at a local shop) to confirm the car exists and is in reasonable condition. They will also pull your official credit report and verify your income and employment. This process typically takes three to five business days.
Once approved, the new lender will contact your current lender to request a payoff quote — the exact amount needed to close your old loan. The new lender then sends you documents to sign (usually electronically). You sign, and the new lender pays off the old loan and funds the new one. This step takes another three to five business days.
During this entire process, you keep making payments to your old lender on schedule. Do not stop paying until you receive confirmation that the old loan has been paid off. Once the new lender funds, your old lender will send you a final statement showing a zero balance.
Know when refinancing does not make sense
Refinancing is not the right move in several situations. If you are planning to sell or trade in the car within the next year or two, the savings may not justify the time and cost. If your current loan has a prepayment penalty (some do), check whether the penalty is larger than your expected savings.
If you are upside down on the loan — you owe more than the car is worth — most lenders will not refinance you. Some credit unions and online lenders will, but they charge higher rates to offset the risk. In this case, refinancing usually does not save money.
If your credit score has dropped significantly since you took out the original loan, the new rate may be higher than your current rate. In this situation, wait until you have improved your score (by paying bills on time and reducing credit card balances) before explore.
Frequently Asked Questions
Will refinancing hurt my credit score?
Yes, but only slightly and temporarily. The hard pull of your credit report lowers your score by a few points for a few months. Multiple hard pulls within a short window (two weeks) typically count as one inquiry, so get all your quotes within a tight timeframe. The new loan will also lower your average age of accounts, which affects your score for a few months. These effects fade as you make on-time payments to the new lender.
Can I refinance if I have a loan from a buy-here-pay-here dealership?
It is difficult but sometimes possible. These loans are typically subprime, and traditional lenders are reluctant to refinance them. Credit unions and online lenders that work with lower credit scores are your best bet. You will need to provide proof that you have been making payments on time for at least six months.
What if my car is worth less than what I owe?
Most mainstream lenders will not refinance you. Some credit unions and online lenders will, but they charge higher rates because they are taking on more risk. In many cases, the higher rate means you do not save money. Your best option is to wait until you have paid down the loan enough that you are no longer upside down.
How long does the whole refinance process take?
From process to funding typically takes one to two weeks. The process and approval process takes three to five business days, and the funding process (after you sign documents) takes another three to five business days. Some online lenders can move faster, sometimes funding within a week.
Do I need to change my car insurance when I refinance?
No. Your insurance policy stays the same because you still own the same car. The new lender will require proof of insurance, but you do not need to notify your insurance company of the refinance. If the new lender requires different coverage than your current policy provides, your insurance company can adjust your policy without changing your rate.