What Refinancing an Auto Loan Means
Refinancing an auto loan means taking out a new loan to pay off your existing car loan. The new lender pays off what you still owe, and you start making payments to the new lender instead. The goal is usually to get a lower interest rate, reduce your monthly payment, or change the length of your loan term.
You keep the same car — refinancing doesn't change your vehicle. What changes is the loan itself: the interest rate, the monthly payment amount, the number of months you'll be paying, or some combination of these. Whether refinancing makes sense depends on your current loan terms, your credit score now versus when you first borrowed, and how much longer you plan to keep the car.
Key Takeaways
- Refinancing works best if your credit score has improved since you took out the original loan, because lenders offer better rates to borrowers with stronger credit.
- You'll need the current payoff amount from your existing lender, the vehicle's current market value, and proof of insurance before you approach a new lender.
- The new lender pays off your old loan directly, so you don't have to manage two loans at once.
- Refinancing costs money upfront — typically $0 to $500 in fees — and takes a few days to complete, so calculate whether the monthly savings justify the cost.
- If you're underwater on your loan (owe more than the car is worth), most lenders won't refinance until you pay down the difference yourself.
When Refinancing Saves You Money
The most common reason to refinance is a lower interest rate. If you borrowed at 8% and your credit has improved enough that you now may have access to for 5%, the difference compounds over time. A $20,000 loan at 8% for 60 months costs roughly $4,400 in interest; the same loan at 5% costs roughly $2,600. That's $1,800 in savings, though you'll subtract any refinancing fees from that number.
Refinancing also makes sense if you need to lower your monthly payment because your financial situation has changed. Extending the loan term from 48 months to 60 months reduces what you pay each month, though you'll pay more interest overall. This is a trade-off: lower monthly pressure now, higher total cost later.
The worst time to refinance is when you're close to paying off the original loan. If you have 12 months left on a 60-month loan, starting a new 48-month loan resets the clock and costs you more in interest, even at a lower rate. Run the numbers before you move forward.
What You Need Before You Start
Call your current lender and ask for your payoff amount — this is the exact balance you owe right now, not your regular monthly statement balance. The payoff amount includes any interest that's accrued since your last payment. Write this number down; you'll need it for every new lender you contact.
You'll also need proof of insurance. Most lenders won't refinance a car that isn't insured, and they'll want to see a current policy document. Your existing insurance usually transfers to the new loan without interruption.
Have your vehicle identification number (VIN) ready — it's on your registration or driver's license. Lenders use the VIN to verify the car's make, model, year, and mileage. You should also know the car's approximate current market value; you can check Kelley Blue Book or NADA Guides for a ballpark figure. This matters because lenders compare what you owe to what the car is worth.
How to Find a New Lender
You have three main options: banks, credit unions, and online lenders. Banks offer competitive rates if you have good credit and an existing relationship with them. Credit unions often have lower rates than banks, but you have to be a member — some credit unions let you join based on where you live or work, while others require a family connection to an existing member.
Online lenders like LendingClub, Upgrade, and others can move quickly and sometimes work with lower credit scores, though their rates are usually higher than banks or credit unions. Get quotes from at least three lenders before deciding. Each lender will do a hard inquiry on your credit, which temporarily lowers your score by a few points, but multiple inquiries within 14 days usually count as one inquiry for credit-scoring purposes.
Ask each lender what their rate would be, what the monthly payment would be, and what fees they charge. Some lenders charge origination fees (typically 0.5% to 1% of the loan amount), while others charge nothing upfront. Factor these fees into your decision.
The Refinancing Process Step by Step
Once you've chosen a lender, you'll submit an process. The lender will order a vehicle inspection or valuation to confirm the car's condition and value. This usually takes a few days and may be done by a third party.
If the lender approves you, they'll send you a Loan Estimate that shows the interest rate, monthly payment, total interest you'll pay over the life of the loan, and all fees. Read this carefully and compare it to your original loan terms. If you're satisfied, you'll sign the loan documents electronically or in person, depending on the lender.
The new lender then pays off your old loan directly. You don't send money anywhere — the lender handles the payoff. Your old lender will send you a final statement showing a zero balance. You'll start making payments to the new lender on the date they specify, usually 30 to 45 days after you sign.
The entire process typically takes 5 to 10 business days from process to funding, though it can be faster with online lenders or slower if the lender needs additional documentation.
Common Obstacles and How to Handle Them
If you owe more than the car is worth — called being underwater — most lenders won't refinance. For example, if you owe $18,000 but the car is worth $15,000, you're $3,000 underwater. Some credit unions and specialized lenders will refinance this gap, but they'll charge a higher interest rate to cover the risk. Your other option is to pay down the difference yourself before refinancing.
If your credit score has dropped since you took out the original loan, you may not may have access to for a better rate. In this case, refinancing doesn't help. Focus on paying down the balance and rebuilding your credit before trying again in 6 to 12 months.
If your car is very old or has high mileage, some lenders won't refinance it at all. They worry the car won't last long enough to justify the loan. Ask the lender about their age and mileage limits before you explore.
Comparing Your Old Loan to Your New One
| Factor | Your Current Loan | Potential New Loan |
|---|---|---|
| Interest rate | ____% | ____% |
| Monthly payment | $____ | $____ |
| Months remaining | ____ | ____ |
| Total interest you'll pay | $____ | $____ |
| Refinancing fees | $0 | $____ |
| Net savings (or cost) | $____ |
Fill in this table with numbers from your current loan statement and the Loan Estimate from the new lender. Subtract the refinancing fees from the interest savings to see your true benefit. If the number is negative, refinancing costs you money overall.
Frequently Asked Questions
Will refinancing hurt my credit score?
Yes, but temporarily. The hard inquiry and new loan account will lower your score by a few points for a few months. However, refinancing can help your score long-term if it lowers your credit utilization or improves your payment history. The short-term dip is usually worth it if the refinancing saves you money.
Can I refinance if I'm behind on payments?
Most lenders won't refinance if you're currently behind. You'll need to bring your account current first. Once you've made on-time payments for at least a few months, you'll be in a stronger position to refinance.
What happens to my old loan documents?
Your old lender will send you a final statement showing the loan is paid in full. Keep this for your records. You don't need to do anything with your old loan documents — the new lender handles the payoff automatically.
How long do I have to keep the car after refinancing?
There's no requirement. You can sell or trade in the car whenever you want. However, if you sell the car before the new loan is paid off, you'll need to pay the difference between the sale price and what you still owe. If you're planning to sell soon, refinancing may not be worth the cost.
Can I refinance with the same lender I borrowed from?
Yes. Some lenders offer refinancing to existing customers and may waive certain fees or offer a slightly better rate. It's worth asking, but still compare their offer to other lenders before deciding.