What Refinancing a Car Loan Means

Refinancing a car loan means taking out a new loan to pay off your existing car loan in full. The new lender pays off the old loan, and you then make payments to the new lender instead. The goal is usually to lower your monthly payment, reduce the interest rate, or shorten the time you spend paying.

You keep the same car — refinancing doesn't change what you drive or who owns it. What changes is who holds the debt and what terms you're paying under. The new loan is secured by the same vehicle, just like your original loan was.

Key Takeaways

  • Refinancing works best when interest rates have dropped since you took out your original loan, or when your credit score has improved enough to may have access to for better terms.
  • You'll need to know your current loan balance, the vehicle's value, and your credit score before you contact lenders to see what rates they can offer.
  • Banks, credit unions, and online lenders all offer car refinancing, and rates vary significantly between them — shopping with at least three lenders takes a few hours and can save hundreds of dollars.
  • The refinancing process typically takes one to two weeks from process to funding, and you'll continue making payments to your original lender until the new one pays them off.
  • Refinancing costs money upfront (title transfer, documentation fees, sometimes an appraisal), so the monthly savings need to be large enough to cover those costs before the loan ends.

When Refinancing Makes Financial Sense

Refinancing is worth considering if interest rates have dropped since you financed the car, or if your credit score has risen significantly. Both of these changes mean you may now may have access to for a lower rate than you're currently paying. A lower rate directly reduces your monthly payment and the total amount you'll pay over the life of the loan.

You should also consider refinancing if you took out the original loan with a co-signer and now want to remove them, or if you want to change the loan term — for example, paying off a 72-month loan in 48 months to own the car faster. However, shortening the term will raise your monthly payment, so this only makes sense if you can afford it.

Refinancing does not make sense if you're underwater on the loan (you owe more than the car is worth), because most lenders won't refinance in that situation. It also doesn't make sense if you're within a year of paying off the original loan, because the upfront costs of refinancing will eat up any savings you'd get from a lower rate.

What You Need Before You Start Shopping

Gather three pieces of information before you contact any lender. First, find your current loan balance — this is on your monthly statement or you can call your current lender and ask. Second, know roughly what your car is worth. You can check sites like Kelley Blue Book or NADA Guides, which let you enter your vehicle's year, make, model, and mileage to get a ballpark value.

Third, check your credit score. You can get it free once per year from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at annualcreditreport.com. Many banks and credit card companies also show your score for free in their online portals. Knowing your score before you shop helps you understand what rates you're likely to see.

You'll also need your driver's license, proof of insurance, and the vehicle's title or registration. Lenders want to confirm you own the car and that it's insured. Have these documents ready before you explore, because the process moves faster when you can provide them when ready.

Where to Shop for Refinancing Rates

Three types of lenders offer car refinancing: banks, credit unions, and online lenders. Banks are what you'd expect — Chase, Bank of America, Wells Fargo, and regional banks all refinance cars. Credit unions often offer lower rates than banks if you're a member, and membership is sometimes open to anyone in a certain geographic area or profession. Online lenders like LendingClub, Upgrade, and SoFi specialize in refinancing and often process applications faster than traditional banks.

Shop with at least three lenders to compare rates. Each lender will pull your credit report, which causes a small temporary dip in your score, but multiple pulls within 14 to 45 days (depending on the credit scoring model) count as a single inquiry. This means you won't be penalized for shopping around as long as you do it within a short window.

When you contact a lender, ask for a rate quote. Most will give you a preliminary rate without a hard credit pull, or they'll do a soft pull that doesn't affect your score. Once you've collected quotes from three lenders, compare not just the interest rate but also the monthly payment, the loan term, and any fees they charge. The lowest rate doesn't always mean the lowest monthly payment if the term is longer.

The Refinancing process and Approval Process

Once you've chosen a lender, you'll fill out a formal process. This is when they do a hard credit pull and verify your income, employment, and the car's details. They may order an appraisal to confirm the vehicle's value, though many lenders skip this step for newer cars or if the loan amount is small relative to the car's value.

Approval typically takes three to five business days, though some online lenders move faster. During this time, the lender is confirming your credit, income, and employment. If they need additional documents — recent pay stubs, tax returns, proof of residence — they'll contact you. Respond quickly, because delays here slow down the whole process.

Once you're approved, the lender will send you loan documents to sign. Read these carefully, because they spell out the interest rate, monthly payment, loan term, and any fees. The lender will also tell you when they'll fund the loan and pay off your old lender. You'll continue making payments to your original lender until that payoff happens — don't stop paying just because you've been approved for refinancing.

Costs and Fees to Expect

Refinancing isn't free. Most lenders charge a documentation or processing fee, which ranges from $0 to $300 depending on the lender. Your state's DMV will charge a fee to transfer the title to the new lender, usually $50 to $200. Some lenders order an appraisal, which costs $100 to $200, though many waive this for loans under a certain amount.

Add up all these costs and compare them to your monthly savings. If you're saving $50 per month and refinancing costs $400, you need to keep the loan for at least eight months just to break even. If you're planning to sell or trade in the car within a year, refinancing probably isn't worth it. If you're keeping the car for several more years, the savings accumulate and refinancing becomes worthwhile.

Some lenders roll these fees into the loan, meaning you don't pay them upfront but you pay interest on them over time. Others require you to pay them out of pocket. Ask each lender which approach they use, because it affects your true cost.

What Happens After You're Approved and Funded

Once the new lender funds the loan, they send the payoff amount directly to your old lender. Your old lender applies that money to your account and sends you a final statement showing a zero balance. You'll receive a new loan document and payment coupon book (or online payment instructions) from your new lender, and that's where you'll make payments going forward.

The title transfer takes a few weeks. Your new lender will handle filing the paperwork with your state's DMV, and you'll eventually receive an updated title showing the new lender as the lienholder. Until that arrives, keep your old title and any paperwork from the payoff in a safe place.

Make sure your first payment to the new lender is on time. Set up automatic payments if you can, because a missed payment on a refinanced loan damages your credit just as much as a missed payment on any other loan. Your payment schedule starts fresh with the new lender, so if your old loan was due on the 15th and your new one is due on the 1st, adjust your budget accordingly.

Frequently Asked Questions

Can I refinance a car I'm still paying off?

Yes. In fact, most people refinance while they still owe money on the original loan. The new lender pays off the remaining balance, and you start fresh with a new loan. You can't refinance if you owe significantly more than the car is worth, because most lenders won't lend more than 125% of the vehicle's value.

Will refinancing hurt my credit score?

Refinancing causes a small temporary dip in your credit score when the lender pulls your credit report. This dip usually recovers within a few months. Over time, refinancing can actually help your score if the new loan lowers your overall debt or improves your payment history, but the when ready effect is slightly negative.

What if my current lender won't release the title?

Your current lender must release the title once the loan is paid in full — this is required by law. The new lender handles this by paying off the old loan directly. You don't need permission from your old lender to refinance. If there's a problem, contact your state's attorney general's office or your state banking regulator.

Can I refinance if I have bad credit?

Some lenders work with people who have lower credit scores, but you'll pay a higher interest rate. If your credit has improved since you took out the original loan, refinancing might still save you money. If your credit is worse now, refinancing probably won't help. Check your score first and get quotes from lenders who work with your credit range.

How long does the whole refinancing process take?

From process to funding typically takes one to two weeks. The process and approval process takes three to five business days, signing documents takes a few days, and funding happens within a week of that. Your old loan is paid off within days of funding, though the title transfer can take several weeks to complete.