Yes, you can refinance an auto loan, but whether it makes sense depends on your credit score, how much you still owe, and current interest rates
Refinancing means replacing your current car loan with a new one, usually from a different lender. The new loan pays off the old one completely, and you start making payments to the new lender instead. People refinance to lower their monthly payment, reduce the total interest they pay, shorten the loan term, or change other loan terms that no longer work for them.
The catch: refinancing only saves you money if the new interest rate is lower than what you're currently paying, or if you're extending the loan so far that you end up paying more interest overall (which defeats the purpose). Your credit score, the age of your car, and how much you still owe all affect whether a lender will refinance you and what rate they'll offer.
Key Takeaways
- Refinancing works best if your credit score has improved since you took out the original loan, because a higher score usually means a lower interest rate.
- You need positive equity in the car — meaning you owe less than it's worth — though some lenders will refinance even if you're slightly underwater.
- The older the car, the harder it is to find a lender willing to refinance, and rates tend to be higher for vehicles over 10 years old.
- Compare offers from banks, credit unions, and online lenders before accepting, because rates vary significantly even for the same borrower.
- Refinancing resets your loan term, so a lower payment might mean paying interest for longer unless you shorten the new loan period.
When refinancing actually saves you money
Refinancing saves money in two scenarios. First, if your credit score has gone up since you got the original loan — because you've paid bills on time, paid down other debts, or fixed errors on your credit report — lenders will offer you a lower rate. Even a 1 or 2 percent drop in interest rate can save hundreds of dollars over the life of the loan.
Second, if interest rates in the market have fallen since you borrowed, new lenders might offer better rates than what you're currently paying. This is less common with auto loans than with mortgages, but it does happen. Check your current rate against what lenders are advertising for someone with your credit profile before you assume rates have dropped.
The math works against you if you're refinancing just to lower your monthly payment by extending the loan. If you owe $15,000 on a 5-year loan at 6 percent and refinance into a 7-year loan at 5 percent, your payment drops — but you're paying interest for two extra years. You'll likely pay more total interest, even at the lower rate.
What lenders look at before they'll refinance you
Lenders check your credit score first. Most banks and credit unions want a score of at least 620 to consider you, though better rates go to borrowers with scores above 700. If your score has dropped since you got the original loan — because of missed payments, high credit card balances, or other problems — you may not may have access to for refinancing, or you'll get a rate higher than what you're already paying.
They also look at how much you owe versus what the car is worth. If you owe $12,000 and the car is worth $14,000, you have positive equity and refinancing is straightforward. If you owe $14,000 and the car is worth $12,000, you're underwater, and most lenders won't touch it. Some credit unions will refinance underwater loans, but they charge higher rates to cover the risk.
The age and mileage of the car matter too. Cars older than 10 years are harder to refinance because they're worth less and break down more often. Lenders may refuse outright, or they'll offer rates 2 to 4 percent higher than they would for a newer vehicle. Very high mileage (over 150,000 miles) triggers the same caution.
How to find and compare refinancing offers
Start with your current bank or credit union, since they already have your financial history and may offer a better rate to keep your business. Then get quotes from at least two other lenders — banks, credit unions, or online lenders — to compare. Each quote should show the interest rate, the new loan term, the monthly payment, and the total interest you'll pay over the life of the loan.
When you request a quote, lenders will do a hard inquiry on your credit, which temporarily lowers your score by a few points. Multiple hard inquiries in a short window (usually 14 to 45 days, depending on the scoring model) count as a single inquiry, so get all your quotes within a two-week period to minimize the damage.
Use a calculator or spreadsheet to compare the total cost of each offer, not just the monthly payment. A loan with a lower payment but a longer term might cost you more in total interest. Factor in any fees the lender charges — some charge origination fees, prepayment penalties, or title transfer fees — and subtract those from your savings.
The refinancing process and what happens to your old loan
Once you accept an offer, the new lender handles most of the paperwork. They'll order a title search to confirm you own the car free and clear (or that their lien will be first), verify your insurance, and confirm the car's value. This usually takes 3 to 7 business days.
When everything clears, the new lender sends a check to your old lender to pay off the remaining balance. Your old loan closes, and you start making payments to the new lender. During this transition, make sure you keep making payments to your original lender until you receive written confirmation that the loan is paid off — don't assume the new lender's check has cleared.
You'll need to provide the new lender with proof of insurance before they'll fund the loan. Your insurance policy doesn't change, but the lender's name will be added to your policy as the lienholder (the party with a financial interest in the car). This is standard and costs nothing.
Reasons not to refinance
Don't refinance if you're close to paying off the original loan. If you have 12 months left on a 5-year loan, refinancing into a new 5-year loan means you're starting the clock over. Even with a lower rate, you'll pay more interest overall because you're extending the payoff date.
Skip refinancing if your credit score has dropped or stayed the same since you got the original loan. You'll either be denied or offered a rate higher than what you're paying now, which defeats the purpose. Wait until you've improved your score — usually 6 to 12 months of on-time payments and lower credit card balances — before trying again.
If the car is very old, has high mileage, or is worth significantly less than what you owe, refinancing is unlikely to be an option. Lenders see these cars as high-risk, and the rates they offer won't save you money. In this case, focus on paying down the loan as fast as you can with your current lender.
Prepayment penalties and other hidden costs
Before you refinance, check your current loan documents for a prepayment penalty — a fee some lenders charge if you pay off the loan early. This fee can range from $200 to $500 or more, depending on the lender and how much is left on the loan. If your current lender charges a prepayment penalty, factor that cost into your refinancing savings calculation.
The new lender may charge an origination fee (usually 1 to 3 percent of the loan amount), a title transfer fee, or a document preparation fee. These aren't always disclosed upfront, so ask specifically what fees explore before you commit. Some lenders advertise "no-fee" refinancing, which can save you several hundred dollars.
Also confirm whether the new loan has a prepayment penalty. Most don't, but some do. If you think you might pay off the loan early or refinance again, choose a lender with no prepayment penalty.
Frequently Asked Questions
How long does refinancing take?
The process usually takes 5 to 10 business days from process to funding. The lender needs time to verify your information, order a title search, confirm your insurance, and process the paperwork. Once funded, it may take another few days for the payoff check to reach your old lender and for your old loan to officially close.
Will refinancing hurt my credit score?
Yes, but only temporarily. The hard inquiry lowers your score by a few points, and opening a new loan account temporarily lowers it further. However, your score usually recovers within a few months as you make on-time payments on the new loan. The long-term benefit of a lower interest rate outweighs the short-term dip for most borrowers.
Can I refinance a car I'm still paying off?
Yes, as long as you have positive equity (the car is worth more than you owe) or the lender is willing to refinance you underwater. You don't need to own the car outright. The new lender will pay off your old loan and take a lien on the car until you pay off the new loan.
What if I have bad credit?
Refinancing with bad credit is difficult. Most mainstream lenders require a credit score of at least 620. If your score is lower, look for credit unions or subprime lenders, but expect rates 4 to 8 percent higher than what borrowers with good credit receive. You may be better off waiting 6 to 12 months to improve your score before refinancing.
Can I refinance with a co-signer?
Yes. If your credit is weak, adding a co-signer with better credit can help you may have access to and get a lower rate. The co-signer is legally responsible for the loan if you don't pay, so make sure they understand the commitment before they agree.