Yes, you can refinance a car loan, and many people do
Refinancing a car loan means taking out a new loan to pay off your existing one. The new lender pays what you still owe, and you start making payments to them instead. You keep the same car — the vehicle itself is collateral for both loans.
Whether refinancing makes sense depends on three things: your credit score now versus when you took the original loan, current interest rates versus your current rate, and how much you still owe. If your credit has improved or rates have dropped, refinancing can lower your monthly payment or the total interest you pay. If you still owe more than the car is worth, refinancing becomes harder but not impossible.
The process typically takes one to two weeks from process to funding. You do not have to refinance with your current lender — in fact, credit unions and online lenders often offer better rates than banks.
Key Takeaways
- Refinancing works best if your credit score has improved since you took the original loan, because a higher score usually means a lower interest rate.
- You need to know your current loan balance, the car's current market value, and your current interest rate before comparing offers from new lenders.
- If you owe more than the car is worth (called being underwater), some lenders will still refinance you, but your options narrow and rates may be higher.
- The savings from refinancing must be large enough to cover the process fee and any title transfer costs, which vary by state.
When refinancing saves you money
Refinancing saves money in two scenarios. The first is when your credit score has risen since you took the original loan. Credit scores determine the interest rate a lender offers you. If you had a score of 620 when you financed the car and now have a score of 720, lenders will offer you a much lower rate. Even a 1 or 2 percent drop in interest rate can save hundreds of dollars over the life of the loan.
The second scenario is when market interest rates have fallen. If you financed at 7 percent and rates are now at 4 percent, refinancing at the new rate saves money — assuming your credit score has not dropped. If your score has dropped, the rate you are offered may be higher than your current rate, and refinancing would cost you money.
The math works like this: calculate the total interest you will pay on your current loan for the remaining months. Then get a quote from a new lender and calculate the total interest on that loan, including any fees. Subtract the fees from the savings. If the number is positive, refinancing is worth considering. If it is close (within a few hundred dollars), the convenience of staying with your current lender may outweigh the savings.
What lenders look at when you refinance
Lenders evaluate refinance applications using the same factors they use for new car loans: your credit score, income, debt-to-income ratio, and the car's value. They also look at how much you still owe on the original loan and whether you have made payments on time.
The car's value matters because it determines how much risk the lender takes. If you owe $15,000 and the car is worth $18,000, the lender is comfortable — they can sell the car and recover their money if you stop paying. If you owe $18,000 and the car is worth $15,000, you are underwater. Some lenders will still refinance you, but they may charge a higher rate or require a larger down payment to bring the loan amount closer to the car's value.
To find the car's current value, use Kelley Blue Book, NADA Guides, or Edmunds. These sites ask for the year, make, model, mileage, and condition. The value they show is what a dealer would pay for your car in trade — not what you could sell it for privately, which is usually higher.
Where to refinance and what to compare
You have three main options: your current lender, a traditional bank, or a credit union or online lender. Your current lender may offer you a rate to keep your business, but they have no incentive to offer their best rate — you are already a customer. Banks often have higher rates than credit unions for the same credit profile. Credit unions and online lenders typically offer competitive rates and faster processing.
When you get quotes, compare the interest rate, the loan term (how many months to pay it back), the monthly payment, and any fees. Some lenders charge an process fee ($50 to $150), and some charge a prepayment penalty if you pay off the loan early — though this is rare for refinances. Your state may charge a title transfer fee, usually $25 to $100.
Do not explore to multiple lenders on the same day if you can avoid it. Each process triggers a hard inquiry on your credit report, and multiple inquiries in a short time can lower your score slightly. However, inquiries for the same type of loan (auto refinance) within 14 to 45 days typically count as a single inquiry, depending on the credit bureau. Ask each lender about their inquiry policy before explore.
The refinancing timeline and what happens to your car
Once you are approved, the new lender pays off your old loan directly. You do not have to do anything — the lenders handle the payoff between themselves. The title to your car is transferred from the old lender to the new one, and you start making payments to the new lender. This usually takes five to ten business days after approval.
During this time, you still own and drive the car normally. You can continue making payments to your old lender until the payoff is complete — do not stop paying. If the new lender's payoff amount is slightly different from what you expected (because of accrued interest), the difference is usually small and handled automatically.
Some lenders offer same-day or next-day funding, but the title transfer still takes several days. If you need the car for a long road trip or have other time-sensitive plans, ask the lender about their timeline before you commit.
Reasons not to refinance
Do not refinance if you are underwater by a large amount and cannot make a down payment. If you owe $20,000 and the car is worth $16,000, most lenders will decline you. Some will refinance the full $20,000, but at a rate so high that you save no money. A few will refinance if you pay $2,000 to $3,000 down to bring the loan amount closer to the car's value — but then you are spending money to refinance, which defeats the purpose.
Do not refinance if you are near the end of your loan. If you have only 12 months left to pay, the interest you will pay is small. Refinancing into a new 60-month loan will lower your monthly payment but increase the total interest you pay over time. The math rarely works in your favor this close to payoff.
Do not refinance if your credit score has dropped significantly since you took the original loan. If you took the loan at 5 percent with a score of 700, and your score is now 600, you will be offered a rate of 8 or 9 percent. Refinancing at a higher rate costs you money.
How refinancing affects your credit score
Refinancing causes a small, temporary dip in your credit score — usually 5 to 10 points. This happens because the hard inquiry and the new loan account both affect your score. The dip is temporary and your score typically recovers within a few months as you make on-time payments to the new lender.
The long-term effect on your credit is usually positive. Refinancing to a lower rate and lower payment can improve your debt-to-income ratio, which lenders look at. Making on-time payments to the new lender builds your payment history. If you refinance and then pay off the loan early, you demonstrate financial responsibility.
The only scenario where refinancing hurts your credit long-term is if you use the lower payment to take on more debt elsewhere. If you refinance and then max out credit cards or take out new loans, your debt-to-income ratio worsens and your score suffers.
Frequently Asked Questions
What if I still owe more than my car is worth?
You are underwater, and refinancing is harder but not impossible. Some credit unions and online lenders will refinance the full amount, but your interest rate will be higher than if you had equity in the car. Others will refinance only if you pay down the difference yourself. If refinancing costs more than you save, it is not worth doing.
Can I refinance if I have missed payments on my current loan?
It depends on how recent the missed payments are. If you missed a payment in the last 60 days, most lenders will decline you. If the missed payment was more than 90 days ago and you have made all payments since, some lenders will consider you. Your interest rate will be higher than if your payment history were perfect.
How long does refinancing take from start to finish?
Most lenders give you a decision within one to three business days of explore. Once approved, funding usually happens within five to ten business days. The title transfer can take another week or two depending on your state's DMV processing time. Total time is typically two to three weeks.
Do I have to refinance with a lender in my state?
No. Online lenders and credit unions with national reach can refinance cars in most states. However, some lenders do not operate in certain states due to state lending laws. When you explore, the lender will tell you when ready if they can refinance in your state.
What happens if I want to sell or trade in my car after refinancing?
You can sell or trade in your car at any time. When you do, the new lender is paid off from the sale proceeds, just like with your original lender. If you owe more than the car is worth, you will need to cover the difference out of pocket or roll it into a new car loan if you are trading in.