What refinancing an auto loan means
Refinancing an auto loan means taking out a new loan to pay off your existing car loan, then repaying the new lender instead of the original one. The new loan has its own interest rate, term length, and monthly payment. People refinance when they find a lower rate than what they're currently paying, which reduces how much interest they'll pay over time.
The process itself is straightforward: you find a lender willing to refinance, they pay off your old loan, and you start making payments to them. Your car stays the same — the lender just changes. The new rate depends on your credit score, the age and mileage of your car, how much you still owe, and current market conditions.
Key Takeaways
- Refinancing makes sense when you can get a lower interest rate than your current loan, which saves you money on interest over the remaining loan term.
- Your credit score is the single biggest factor lenders look at — a higher score usually means a lower rate, so checking your score before shopping helps you know what to expect.
- Lenders include banks, credit unions, and online lenders, and rates vary between them, so comparing offers from at least three lenders gives you real options.
- Refinancing works best when you have at least a year or two left on your loan, because the savings need time to outweigh any fees the new lender charges.
- Your car's value and how much you still owe matter — lenders won't refinance if you owe significantly more than the car is worth.
How your credit score affects the rate you'll see
The interest rate a lender offers you depends most heavily on your credit score. A higher score signals to lenders that you've paid past debts on time, so they charge you less interest. A lower score means higher risk to them, so they charge more. The difference between a score of 620 and 750 can easily be 2 to 4 percentage points, which translates to hundreds of dollars over the life of the loan.
Before you start shopping for refinance offers, pull your own credit report and score. You can get your credit report free once per year from annualcreditreport.com, which is the official site run by the three major credit bureaus. Your score itself may cost a few dollars, or you can check it free through your bank, credit card company, or a site like Credit Karma. Knowing your score before you talk to lenders means you won't be surprised by the rates they quote, and you'll know whether your score has improved since you took out the original loan.
Where to look for refinance rates
Three main types of lenders offer auto refinancing: banks, credit unions, and online lenders. Banks are what you probably think of first — your own bank may refinance your loan, and other banks in your area will too. Credit unions often have lower rates than banks if you're a member, and membership sometimes requires living or working in a certain area or belonging to a particular group. Online lenders like LendingClub, Upgrade, and Lightstream operate only online but can fund loans quickly.
Each lender sets its own rates based on your credit score, income, employment history, and the car itself. Rates also shift with the broader economy — when the Federal Reserve raises its benchmark rate, lender rates tend to rise too. This means the rate you see today may not be the rate you see next week. The only way to know what you can actually get is to contact lenders directly and ask for a quote. Most lenders can give you an estimate without a hard credit pull, which doesn't hurt your score.
Start by getting quotes from at least three lenders — your current lender, a local credit union if you're a member, and one online lender. Write down the rate, the loan term they're offering, and any fees they mention. Then compare: a lower rate on a longer term might actually cost you more in total interest than a slightly higher rate on a shorter term.
When refinancing saves you money
Refinancing only makes financial sense if the new rate is lower than your current rate and you keep the loan long enough for the savings to outweigh any fees. Most lenders charge an origination fee (usually 0 to 1 percent of the loan amount) or a prepayment penalty from your current lender. If you're refinancing a $20,000 loan with a 1 percent origination fee, that's $200 you'll owe upfront.
To figure out whether refinancing is worth it, calculate how much interest you'll save with the new rate over the remaining term of your loan, then subtract the fees. If you have 36 months left on your current loan at 7 percent interest and you can refinance at 5 percent, a calculator will show you the interest difference. If that difference is larger than the fees, refinancing makes sense. If you only have 6 months left on your loan, the interest savings will be small, and fees might eat up most or all of it.
The longer you plan to keep the car, the more refinancing benefits you. If you're planning to sell or trade in the car within a year, refinancing probably isn't worth the effort.
What lenders look at besides your credit score
Your credit score is the biggest factor, but lenders also consider the car itself. They want to know the year, make, model, mileage, and current condition. Newer cars with lower mileage are easier to refinance because they're worth more. A 2015 Honda Civic with 80,000 miles is refinanceable; a 2008 Honda Civic with 180,000 miles may be harder to place, and you might not find a lender willing to take it on.
Lenders also look at how much you still owe compared to what the car is worth — this is called the loan-to-value ratio. If you owe $15,000 on a car worth $18,000, that's a healthy ratio and lenders will compete for your business. If you owe $15,000 on a car worth $12,000, you're "upside down" on the loan, and most lenders won't refinance you because they'd lose money if you stopped paying and they had to repossess and sell the car.
Your income and employment history matter too. Lenders want to see that you have a stable job and income to cover the new payment. Self-employed people sometimes face extra scrutiny and may need to provide tax returns or bank statements to prove income.
The refinancing process and timeline
Once you've chosen a lender and they've approved you, the process moves quickly. The lender will contact your current lender to find out the exact payoff amount — this is important because your loan balance changes slightly each month as you make payments. The new lender pays off the old loan in full, and you sign documents for the new loan. You then start making payments to the new lender on the new schedule.
The whole process typically takes 5 to 10 business days from approval to funding. During that time, keep making your regular payment to your current lender unless the new lender tells you to stop. Once the new lender has paid off the old loan, you'll receive a notice from your original lender confirming the payoff. Keep that notice for your records.
One thing to watch: if your current loan has a prepayment penalty, you'll owe it when you refinance. Some lenders charge a penalty if you pay off the loan early — this is less common now than it used to be, but it's worth checking your loan documents or calling your lender to ask.
Deciding between a shorter term and a lower payment
When you refinance, you can choose a new loan term — the length of time you have to repay. You might refinance into the same term you had left, a shorter term, or even a longer term. Each choice has a trade-off. A shorter term means a higher monthly payment but less total interest paid. A longer term means a lower monthly payment but more total interest paid.
If your goal is to save money overall, choose the shortest term you can afford. If your goal is to lower your monthly payment because money is tight right now, a longer term helps — but you'll pay more interest. Some people refinance into a longer term to lower the payment, then pay extra toward principal when they can. That approach works if you have the discipline to actually make those extra payments.
Frequently Asked Questions
Will refinancing hurt my credit score?
Refinancing will cause a small, temporary dip in your credit score because the lender does a hard credit inquiry and opens a new account. The dip is usually 5 to 10 points and recovers within a few months. The long-term benefit of a lower interest rate and on-time payments to the new lender typically outweighs this temporary effect.
Can I refinance if I'm behind on my current loan?
Most lenders won't refinance a loan you're behind on. Being current on your payments is usually a requirement. If you're struggling with payments, contact your current lender first to discuss options like a payment deferment or loan modification before exploring refinancing.
What if my car is worth less than what I owe?
Being upside down on your loan makes refinancing much harder. Some credit unions and lenders will refinance negative equity, but they charge higher rates to offset the risk. Your best option is to make extra payments toward principal to bring the loan-to-value ratio closer to even, then refinance later.
Do I need to refinance through my current lender?
No. You can refinance through any lender — a different bank, a credit union, or an online lender. Shopping around is actually the smart move because rates vary significantly between lenders. Your current lender may match a competitor's offer if you ask, but you're not obligated to stay with them.
How often can I refinance?
There's no legal limit to how many times you can refinance, but lenders may be hesitant to refinance a loan you've already refinanced recently. Each refinance involves a hard credit inquiry and closing costs, so refinancing multiple times in a short period can cost you more than you save. Most people refinance once, maybe twice over the life of a car loan.