What refinancing a car loan means, and when it makes sense
Refinancing a car 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 main reason people refinance is to get a lower interest rate — which means smaller monthly payments or paying off the car faster without changing your payment amount.
Refinancing makes the most sense if your credit score has improved since you took out the original loan, if interest rates have dropped in the market, or if you're early enough in the loan that you haven't paid most of the interest yet. If you're already three or four years into a five-year loan, refinancing may not save you enough to be worth the paperwork and fees involved.
You can refinance through a bank, credit union, or online lender. The process is similar to getting the original loan: you'll provide proof of income, your driver's license, and information about the car (the vehicle identification number, or VIN, and the current loan details). The new lender will run a credit check, which temporarily lowers your score by a few points, but that effect fades within a few months.
Key Takeaways
- Refinancing works best when your credit score has risen, market interest rates have fallen, or you're early enough in the loan that interest charges are still substantial.
- The new lender pays off your old loan directly, so you'll need your current loan account number and the payoff amount before you start the process.
- Rates vary by lender, credit score, loan term, and the age and mileage of the car, so comparing offers from at least three lenders gives you real options.
- Refinancing involves a hard credit inquiry and sometimes a title transfer fee, so calculate whether your monthly savings will cover these costs within a year or two.
How your credit score and the car's age affect the rate you'll be offered
The interest rate a lender offers you depends most heavily on your credit score. If your score was 620 when you took out the original loan and is now 700, you'll see a noticeably lower rate. The difference between a 700 score and a 750 score is smaller but still real — typically a quarter to half a percentage point. You can check your own score free through AnnualCreditReport.com or through your bank's website; most banks now show your score for free even if you don't have a loan with them.
The age and mileage of the car also matter. Most lenders will refinance a car up to about 120,000 miles and up to about 10 years old, but the rate gets worse as the car gets older. A car with 40,000 miles will get a better rate than one with 100,000 miles. Some lenders have stricter limits — they may only refinance cars under 7 years old or under 80,000 miles — so if your car is older or has high mileage, you may have fewer lenders to choose from.
The loan term you choose (36 months, 48 months, 60 months, and so on) also affects the rate. A shorter term usually gets a slightly lower rate, but your monthly payment will be higher. A longer term spreads the payment out, lowering the monthly amount but raising the total interest you pay over the life of the loan.
Comparing offers from different lenders
Get rate quotes from at least three lenders before deciding. Banks, credit unions, and online lenders all offer car refinancing, and their rates can differ by a full percentage point or more. A credit union often has lower rates than a bank if you're a member, so check with yours first. Online lenders like LendingClub, Lightstream, and SoFi let you see a rate estimate without a hard credit inquiry, so you can compare without damaging your score multiple times.
When you get a quote, ask for the annual percentage rate (APR), not just the interest rate. The APR includes fees and gives you the true cost of borrowing. Also ask whether there are any prepayment penalties — some lenders charge a fee if you pay off the loan early, which would eat into your savings if you plan to pay it down faster.
Once you've narrowed it down, you can explore formally with your top choice. The formal process includes a hard credit inquiry, which is why you want to do this only once or twice, not with every lender. Most lenders will give you a rate lock for 30 to 60 days, so you have time to think it over before committing.
Calculating whether refinancing will actually save you money
Refinancing involves costs: a title transfer fee (usually $50 to $200, depending on your state), and sometimes a loan origination fee (typically 0 to 1 percent of the loan amount). Some lenders waive these fees, so ask. You also lose any remaining benefits from your old loan — for example, if your original lender offered roadside information or gap insurance, that coverage ends when you refinance.
To know whether refinancing is worth it, calculate your monthly savings and divide it by the total cost of refinancing. If refinancing costs $150 and saves you $30 a month, it takes five months to break even. If you plan to keep the car for at least that long, refinancing makes sense. If you're planning to sell or trade in the car within a year, the savings probably won't cover the costs.
Use an online calculator (search "car refinance calculator") and plug in your current loan balance, current interest rate, remaining term, and the new rate you've been offered. The calculator will show you the new payment and total interest, so you can see the difference in dollars.
What happens during the refinancing process
Once you've chosen a lender and been approved, the new lender will contact your current lender to get the exact payoff amount. This is important because the payoff amount includes interest accrued up to the day the loan is paid off, and it changes daily. The new lender will send the payoff amount directly to your old lender, and your old loan is closed.
You'll receive new loan documents and a new payment schedule. Your first payment to the new lender usually starts 30 to 45 days after the loan closes. During that gap, make sure you know whether you should still make a payment to your old lender — usually you won't, but confirm with both lenders to avoid confusion.
The title to your car may need to be transferred to the new lender's name, depending on your state and whether the old lender held the title. Your new lender will handle this paperwork and send you the updated title once the loan is paid off. The whole process typically takes one to two weeks from approval to funding.
When refinancing doesn't make sense
If you're deep into your loan — say, you have only 12 to 18 months left to pay — refinancing probably won't save you enough money to justify the fees and paperwork. Most of the interest on a car loan is paid in the first half of the loan term, so if you're past that point, a lower rate won't help much.
If your credit score hasn't improved much since you got the original loan, or if market interest rates haven't dropped, you won't get a significantly better rate. Check what rate you'd be offered before you explore; if it's only a quarter percent lower than your current rate, the savings may not be worth the effort.
If your car is very old, has very high mileage, or has been in an accident, you may not be able to refinance at all. Some lenders straightforward won't refinance cars in those situations, or will only do so at a rate that's not much better than what you have now.
Frequently Asked Questions
Will refinancing hurt my credit score?
Yes, but only temporarily. The hard credit inquiry will lower your score by a few points, and opening a new loan account will also have a small effect. However, these effects fade within a few months, and your score usually recovers within six months. If you're planning to explore for a mortgage or another major loan soon, you might want to wait until after that process is complete.
Can I refinance if I'm underwater on my loan?
Being underwater means you owe more than the car is worth. Most lenders won't refinance an underwater loan, but some will if your credit score is good and you're current on payments. A few lenders specialize in underwater refinancing, though they may charge higher rates. Call your current lender or a credit union to ask whether they offer this option.
What if I want to change the loan term when I refinance?
You can choose a different term — for example, refinancing a 60-month loan into a 48-month loan to pay it off faster. Shorter terms have lower rates but higher monthly payments. Longer terms lower your monthly payment but cost more in total interest. The calculator will show you the trade-off for each option.
Do I need to tell my insurance company if I refinance?
Your insurance company doesn't need to know about the refinance itself, but if the new lender requires full coverage (collision and comprehensive), you'll need to maintain that coverage and provide proof to the lender. Check your insurance policy to see what coverage you currently have, and ask your new lender what they require.