What refinancing a car loan means
Refinancing a car loan means replacing your current loan with a new one, usually 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. You keep the same car — nothing changes about the vehicle itself.
People refinance for one main reason: to lower their monthly payment or the total interest they pay over the life of the loan. This happens when you can get a new loan at a lower interest rate than your current one, or when you extend the loan term to spread payments over more months. Sometimes both happen at once.
Refinancing is not the same as trading in your car or selling it. You are keeping the car and just changing who you owe money to and on what terms.
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 better terms.
- The refinancing process involves getting quotes from banks, credit unions, and online lenders, then submitting your process to your chosen lender.
- Your new lender will contact your current lender to pay off the remaining balance, so you do not have to manage two loans at once.
- Refinancing costs money upfront — title transfer fees, document fees, and sometimes appraisal fees — so calculate whether the monthly savings justify the cost.
- If you are deep into your loan term, refinancing may not save you money even at a lower rate, because most of your remaining payments go toward interest anyway.
When refinancing actually saves you money
Refinancing saves money in two situations. The first is when current interest rates are lower than the rate on your existing loan. If you took out a loan at 7% and rates have dropped to 4%, a new lender will offer you that lower rate. The difference compounds over years of payments.
The second situation is when your credit score has improved since you got your original loan. Lenders use credit scores to set interest rates. If you had a lower score when you first borrowed, you paid a higher rate. If your score has risen — through on-time payments, paying down other debt, or correcting errors on your credit report — you now may have access to for a better rate from a new lender.
The catch is that refinancing costs money upfront. You will pay a title transfer fee (usually $50 to $200), document processing fees ($100 to $300), and sometimes an appraisal fee ($100 to $200) if the lender requires one. Before you refinance, calculate whether your monthly savings will cover these costs within a reasonable time. If you plan to sell or trade in the car within a year, refinancing probably does not make sense.
How to find and compare refinancing offers
Start by getting your current loan details: the remaining balance, your current interest rate, and how many months are left on the loan. You can find this on your monthly statement or by calling your current lender.
Then get quotes from at least three lenders. Banks, credit unions, and online lenders all offer auto refinancing. Credit unions often have lower rates for members, so if you belong to one, start there. Online lenders like LendingClub, Upgrade, and SoFi let you get a quote without a hard credit pull first — they use a soft inquiry that does not affect your credit score. Banks like Wells Fargo and Chase also refinance auto loans.
When you compare offers, look at three numbers: the new interest rate, the new loan term (how many months you have to pay), and the total interest you will pay over the life of the loan. A lower monthly payment is not always better if it means paying more interest overall because the loan is stretched out longer. Use an auto loan calculator to see the total cost of each offer.
The refinancing process and approval process
Once you choose a lender, you will fill out an process. You will need your driver's license, proof of income (recent pay stubs or tax returns), proof of insurance, and the vehicle identification number (VIN) from your car's title or registration. Some lenders ask for recent bank statements as well.
The lender will run a hard credit inquiry, which temporarily lowers your credit score by a few points. This is normal and expected. They will also verify that you own the car and that there are no liens on it besides the current loan you are refinancing.
Approval typically takes three to five business days. Once approved, the new lender will contact your current lender, get the exact payoff amount, and arrange payment. You do not have to do anything during this handoff — the two lenders handle it. After the payoff is processed, your old loan closes and your new one begins. You will receive new loan documents and payment instructions from your new lender.
What happens to your car title during refinancing
Your car's title shows who holds the lien — that is, who has the legal claim to the car if you stop paying. When you refinance, the lien holder changes from your old lender to your new lender. The new lender will file paperwork with your state's motor vehicle department to update the title.
You do not need to do this yourself. The new lender handles the title transfer as part of the refinancing process. However, you will need to pay a title transfer fee, which varies by state but usually runs $50 to $200. Some lenders roll this into the new loan; others ask you to pay it upfront. Ask before you sign.
Once the new lender is listed on the title, you will receive an updated title document in the mail. Keep it with your car's registration and insurance documents.
Reasons refinancing might not work for you
If you are far into your loan — say, with only 12 to 18 months left — refinancing probably will not save money. By this point, most of your remaining payments go toward interest that you have already accrued. Refinancing resets the clock and spreads new interest charges across a longer period, even at a lower rate.
If your credit score is still low or has not improved much since you took out the original loan, you may not may have access to for a better rate. Lenders have minimum credit score requirements, which vary. Some will work with scores in the 600 range; others want 650 or higher. If you are turned down, focus on raising your score before trying again.
If you are underwater on your loan — meaning you owe more than the car is worth — refinancing becomes harder. Some lenders will still refinance, but they may charge a higher rate or require a larger down payment to cover the gap. Check your car's value on Kelley Blue Book or NADA Guides and compare it to your remaining loan balance.
Frequently Asked Questions
Will refinancing hurt my credit score?
Yes, but only temporarily. The hard credit inquiry lowers your score by a few points, usually for three to six months. Making on-time payments on your new loan will rebuild it. The score dip is normal and lenders expect it when you refinance.
Can I refinance if I still owe more than the car is worth?
Yes, but it is harder. Some lenders refinance underwater loans, though they may charge a higher rate or ask you to pay part of the gap upfront. Ask lenders directly whether they work with negative equity before you explore.
What if my current lender charges a prepayment penalty?
Some loans include a penalty for paying off early. Check your loan documents or call your lender to ask. If there is a penalty, factor it into your refinancing calculation — the savings from a lower rate may not be worth the penalty cost.
How long does the whole refinancing process take?
From process to approval usually takes three to five business days. The lender then contacts your old lender and arranges payoff, which adds another five to ten business days. You should see your first payment to the new lender within two to three weeks of approval.
Do I have to refinance with a bank, or can I use a credit union?
You can refinance with any lender — banks, credit unions, or online lenders. Credit unions often have lower rates for members, so check yours first. You do not have to refinance with the same type of lender you originally borrowed from.