What Refinancing a Car Loan Means
Refinancing a car 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 payments to the new lender instead. The goal is usually to get a lower interest rate, which reduces your monthly payment or the total amount you pay over the life of the loan.
You keep the same car and the same lender holds the title until you finish paying. The only thing that changes is who you owe money to and what rate you pay. This is different from trading in your car or selling it — you are not changing vehicles, just changing the terms of the debt.
Key Takeaways
- Refinancing works best when your credit score has improved since you took out the original loan, because lenders offer better rates to borrowers with stronger credit.
- You will need the current loan payoff amount, the vehicle identification number (VIN), and proof of insurance before you contact a lender.
- Banks, credit unions, and online lenders all offer car refinancing, and rates vary significantly between them — getting quotes from at least three is standard practice.
- The refinancing process takes one to two weeks from process to funding, and you should not make extra payments on your current loan while your process is pending.
- Refinancing makes financial sense only if the new rate is at least 0.5 to 1 percentage point lower than your current rate and you plan to keep the car long enough to recoup closing costs.
When Refinancing Saves You Money
Refinancing saves money in two situations: when your credit score has risen since you got the original loan, or when market interest rates have dropped. If you took out a car loan with a 7 percent rate and your credit score has improved from 620 to 720, lenders will now offer you a rate closer to 4 or 5 percent. That difference directly lowers your monthly payment.
The math matters. If you owe $15,000 on a five-year loan at 7 percent, your monthly payment is roughly $296. Refinancing that same $15,000 at 4 percent over five years brings the payment down to about $276 — a $20 monthly savings. Over the remaining life of the loan, that adds up. However, if the new rate is only 0.25 percentage points lower, the savings may not cover the closing costs, which typically run $50 to $300.
Refinancing also makes sense if you want to shorten the loan term. You could refinance a three-year-old five-year loan into a new two-year loan at a better rate, paying off the car faster and paying less interest overall. The monthly payment will be higher, but the total interest paid drops significantly.
Documents and Information You Will Need
Before you contact a lender, gather the following: your current loan payoff amount (call your current lender or check your latest statement), the vehicle identification number (VIN — on your registration or dashboard), proof of insurance, and your driver's license. Some lenders also ask for recent pay stubs or tax returns to verify income, though this is less common for refinancing than for an original car loan.
You will also need to know the current market value of your car. Lenders use this to determine how much they will lend — they typically will not lend more than the car is worth. Use Kelley Blue Book or NADA Guides to get a realistic estimate based on your car's year, make, model, mileage, and condition. If you owe more than the car is worth (called being "upside down"), most lenders will not refinance you, though some credit unions will.
Have your current loan documents available when you explore. The lender will want to confirm the original loan amount, the rate, and the remaining term. This takes five minutes to gather and speeds up the process process.
Where to Get Refinancing Quotes
Three types of lenders offer car refinancing: banks, credit unions, and online lenders. Banks are the most familiar but often have higher rates. Credit unions typically offer lower rates to members and are worth joining if you are not already a member — many have low or no membership fees. Online lenders like LendingClub and Upgrade process applications quickly and may approve borrowers with lower credit scores.
Get quotes from at least three lenders before deciding. Each quote is a soft inquiry, meaning it does not hurt your credit score. Rates vary by $1,000 or more over the life of the loan depending on the lender, so shopping around is not optional. Most lenders provide a quote within 24 hours of your process.
When comparing quotes, look at the interest rate, the loan term, and the monthly payment — but also ask about closing costs. Some lenders charge an origination fee, a documentation fee, or a title transfer fee. A lender with a slightly higher rate but no closing costs may be cheaper overall than one with a lower rate and $300 in fees.
The Refinancing Process and Timeline
Once you choose a lender and are approved, the process moves quickly. The lender orders a title search and appraisal of your car, which takes three to five business days. During this time, you continue making payments to your current lender — do not skip or delay a payment. If you are approved, the new lender sends the payoff amount directly to your old lender and receives the title.
You will then sign the new loan documents, either in person at a branch or electronically. The new lender funds the loan and sends you the title or a lien release document. From process to funding typically takes one to two weeks. Your first payment to the new lender is usually due 30 to 45 days after funding, giving you a brief grace period.
During the process process, do not make large purchases, explore for other credit, or change jobs if you can avoid it. Lenders may re-check your credit or income before funding, and significant changes can delay approval or change your rate. Also, do not make extra payments on your current loan while your process is pending — if the payoff amount changes, it can complicate the refinancing.
When Refinancing Does Not Make Sense
Do not refinance if you are within the first year of your original loan. Early in a loan, most of your payment goes toward interest, so refinancing resets that clock. You will pay more interest overall even with a lower rate. Similarly, if you plan to sell or trade in the car within the next two years, the closing costs will not pay for themselves.
Refinancing also does not work if your credit score has not improved or if market rates have not dropped. If your rate is already 3 percent and the best new rate you can get is 2.9 percent, the $0.10 monthly savings is not worth the paperwork. A general rule: refinance only if the new rate is at least 0.5 to 1 percentage point lower than your current rate.
Finally, be cautious if you are behind on payments or have missed payments recently. Most lenders will not refinance you until you have made on-time payments for at least six months. If you are struggling with your current payment, refinancing into a longer loan term might lower the monthly payment, but you will pay more interest overall — it is a short-term fix, not a solution.
Frequently Asked Questions
Will refinancing hurt my credit score?
A hard inquiry from the lender will lower your score by a few points temporarily, but the impact is small and fades within a few months. If you get multiple quotes within two weeks, the inquiries usually count as one inquiry for scoring purposes. Your score may actually improve over time if refinancing lowers your monthly payment and makes it easier to pay on time.
Can I refinance if I still owe more than the car is worth?
Most banks and online lenders will not refinance you if you are upside down on the loan. Some credit unions will, but they may require you to pay the difference out of pocket or add it to the new loan. Call your credit union first if you are a member — they are more flexible on this than banks.
What happens to my old loan if I refinance?
The new lender pays off the old loan in full, and your old lender releases the title. You receive a lien release document or the title itself, depending on your state. You are no longer obligated to the old lender. Make sure you receive written confirmation that the old loan is paid in full.
How much can my monthly payment drop?
The drop depends on how much lower your new rate is and how long your new loan term is. A 2 percentage point rate drop on a $15,000 loan typically saves $20 to $40 per month. If you also extend the loan term, the savings are larger but you pay more interest overall. Use an online car loan calculator to see the exact numbers for your situation.
Should I refinance with my current lender or a different one?
Your current lender may offer you a better rate to keep your business, so ask them for a quote. However, they have no incentive to offer you their absolute best rate — they know switching costs time and effort. Always get quotes from at least two other lenders to may support you are getting a competitive offer.