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 owe on the old loan, and you start making payments to the new lender instead. The goal is usually to lower your monthly payment, reduce the interest rate, or shorten the time you have left to pay.
You keep the same car — refinancing only changes who you owe money to and the terms of that debt. The new lender will want to know the car's current value, your credit score, and your income, much like when you first financed the vehicle.
Key Takeaways
- Refinancing makes sense 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 a better rate.
- You can refinance through banks, credit unions, or online lenders, and shopping with multiple lenders takes a few days but can save you hundreds of dollars.
- The new lender will check your credit and the car's value, so you need your loan documents, proof of insurance, and a recent vehicle inspection ready.
- Refinancing costs nothing upfront, but some lenders charge origination fees or require you to pay off the old loan within a set timeframe.
- If you owe more than the car is worth, most lenders will not refinance unless you pay down the difference first.
When refinancing saves you money
The most common reason to refinance is that interest rates have fallen since you took out your original loan. If you financed at 7% and rates are now at 4%, a new lender may offer you that lower rate. Even a 1% or 2% drop on a $20,000 loan can save you $100 to $200 per year in interest.
A second reason is that your credit score has improved. If you had a lower score when you first financed the car — perhaps you had recent late payments or high credit card balances — your score may be stronger now. Lenders use credit scores to set interest rates, so a higher score can unlock a lower rate from a new lender.
You may also refinance to change the loan term. If you have four years left on a five-year loan and want to pay it off faster, refinancing into a three-year loan will raise your monthly payment but cut your total interest cost. Conversely, if money is tight, refinancing into a longer term will lower your monthly payment, though you will pay more interest overall.
Where to refinance and how to compare offers
You can refinance through banks, credit unions, or online lenders. Credit unions often offer lower rates than banks if you are a member, so check with yours first. Banks and online lenders let you start the process on their websites and usually give you a rate estimate within minutes, though the final rate depends on a full credit check.
Get quotes from at least three lenders before deciding. Each lender will do a hard credit inquiry, which temporarily lowers your credit score by a few points, but multiple inquiries within 14 days usually count as one inquiry for scoring purposes. Compare the interest rate, the monthly payment, the total amount you will pay over the life of the loan, and any fees the lender charges.
Watch for origination fees, which some lenders charge to process the new loan. These typically range from $0 to $500 and are usually deducted from the loan amount or added to it. A lender with a slightly higher rate but no origination fee may cost less overall than one with a lower rate and a $300 fee.
Documents and information you will need
Have your current loan documents ready — the lender will want to know the exact balance, the interest rate, and the remaining term. You will also need proof of insurance on the vehicle and the vehicle identification number (VIN), which is on your registration or the driver's side dashboard.
The new lender will order a vehicle valuation report to confirm the car is worth at least what you owe. You do not have to arrange this yourself; the lender handles it. However, if the car has significant damage or very high mileage, the valuation may come in lower than you expected, which can affect whether the lender will refinance.
Bring recent pay stubs or tax returns to show your income, and be ready to provide your Social Security number for the credit check. Some lenders ask for a recent utility bill or lease to verify your address.
The refinancing process and timeline
Once you choose a lender and are approved, the lender will contact your current lender to find out the exact payoff amount. This amount may be slightly different from your last statement because interest accrues daily. The new lender then sends the payoff funds directly to your old lender, and your old loan is closed.
You will receive new loan documents from the new lender, which you sign and return. Some lenders allow you to sign electronically; others mail documents to you. After you sign, the new lender records the lien on your vehicle's title — this shows they have a legal claim to the car until the loan is paid off.
The entire process usually takes 7 to 14 days from approval to the first payment to your new lender. During this time, you continue making payments to your old lender as scheduled. Once the payoff is complete, your old lender will send you a release of lien, which you keep for your records.
Situations where refinancing may not work
If you owe more than the car is worth — called being "underwater" on the loan — most lenders will not refinance. For example, if you owe $15,000 but the car is worth $12,000, you are $3,000 underwater. Some credit unions or banks will refinance the full amount if your credit is strong, but many will not. Your option is to pay down the difference yourself before refinancing, or to wait until the car's value rises or you pay down enough of the loan.
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 does not make financial sense unless you need to lower your monthly payment by extending the loan term, which will cost you more in interest overall.
Some lenders have restrictions on older vehicles or those with very high mileage. If your car is more than 10 years old or has over 150,000 miles, fewer lenders will consider it, though some credit unions and online lenders are more flexible.
Costs and fees to watch for
Refinancing itself is free — there is no cost to explore or to have the lender review your loan. However, some lenders charge an origination fee to process the new loan, typically $0 to $500. A few lenders charge a prepayment penalty if you pay off the old loan too quickly, though this is uncommon and usually only applies if you refinance within the first year.
Your state may charge a small fee to record the new lien on your vehicle's title, usually $10 to $50. The new lender typically handles this and may roll it into the loan amount or charge it separately. Ask the lender upfront what fees, if any, you will owe.
One hidden cost is the interest you save by refinancing sooner. If you refinance early in your original loan term, you have already paid most of the interest, so the savings may be small. Use an online refinance calculator to estimate how much you will save before you commit.
Frequently Asked Questions
Can I refinance if I have a loan from a buy-here-pay-here dealer?
Buy-here-pay-here loans are harder to refinance because these dealers often have strict contracts that penalize early payoff. Check your loan documents for a prepayment penalty clause. If there is one, the cost of paying it off may outweigh the savings from refinancing. Some credit unions will still refinance these loans, but you will need to ask.
What happens to my old loan if the new lender does not send the payoff in time?
The new lender is responsible for paying off the old loan on time. If there is a delay, interest continues to accrue on the old loan, and you may owe a few extra dollars when it is finally paid off. This is rare, but ask the new lender for a timeline and follow up if you do not see the payoff posted within two weeks.
Will refinancing hurt my credit score?
Refinancing causes a small, temporary dip in your credit score because the lender does a hard inquiry and opens a new account. The dip usually recovers within a few months. The long-term effect is positive if refinancing lowers your overall debt or improves your payment history.
Can I refinance if I am behind on payments?
Most lenders will not refinance if you are currently behind on your loan. You will need to bring the loan current first, then wait at least 30 to 60 days before explore. Some credit unions are more flexible, so it is worth asking, but expect to pay a higher interest rate if they do approve you.
What if the new lender's rate is higher than my current rate?
Do not refinance. A higher rate means you will pay more in interest over time. Refinance only if the new rate is lower, or if you are willing to accept a slightly higher rate in exchange for a significantly lower monthly payment or a much shorter loan term.