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 then make monthly payments to the new lender instead. The goal is usually to lower your monthly payment, reduce the interest rate, or shorten how long you'll be paying.
You keep the same car — refinancing doesn't change what you drive or who owns it. What changes is the terms of the debt itself. A lower interest rate means you pay less total interest over the life of the loan. A longer loan term means smaller monthly payments, though you'll pay more interest overall. A shorter term means higher monthly payments but less interest paid.
Key Takeaways
- Refinancing makes sense if your credit score has improved since you took out the original loan, or if interest rates have dropped in the market.
- You'll need your current loan balance, the vehicle's current value, and your credit score to shop for a new loan.
- Banks, credit unions, and online lenders all offer auto refinancing, and rates vary significantly between them.
- The refinancing process typically takes one to two weeks from process to funding, and you can usually keep driving your car throughout.
- Refinancing costs money upfront — title transfer fees, document fees, and sometimes appraisal fees — so compare the total savings against these costs before committing.
When refinancing actually saves you money
Refinancing only makes financial sense if the new loan costs you less over time than keeping your current loan. The most common reason to refinance is a higher credit score. If your score was lower when you first borrowed, you likely got a higher interest rate. As your score improves — through on-time payments, lower credit card balances, or paying off other debts — lenders will offer you better rates.
Market interest rates also matter. If rates have dropped since you took out your loan, refinancing into a lower rate can save you hundreds or thousands of dollars. You can check current auto loan rates online through banks, credit unions, and lenders like LendingClub or Upstart to see what's available for your credit profile.
The math works like this: calculate how much interest you'll pay on your current loan for the remaining months, then get quotes on a new loan and calculate the interest you'd pay there. Subtract the new loan's interest from the old loan's interest. If that number is larger than the upfront costs of refinancing (see below), refinancing saves money. Many lenders have online calculators that do this automatically.
Upfront costs that reduce your savings
Refinancing isn't free. Your new lender will charge a loan origination fee, typically 1 to 5 percent of the loan amount. Your state's DMV will charge a title transfer fee — this varies widely by state, from under $20 in some states to over $200 in others. Some lenders also charge document preparation fees or require an appraisal of the vehicle, which can cost $100 to $300.
Add these costs together and compare them to your projected savings. If you'll save $800 in interest but pay $400 in refinancing fees, your net savings is $400. If you'll save $200 in interest but pay $350 in fees, refinancing costs you money overall and doesn't make sense.
Where to shop for a refinance loan
Credit unions often offer the lowest rates, especially if you're a member. If you're not a member of a credit union, many allow you to join based on where you work, where you live, or by joining an organization you belong to. Check CU.org to find credit unions near you and see their membership requirements.
Banks like Chase, Wells Fargo, and Bank of America offer auto refinancing, though their rates tend to be higher than credit unions. Online lenders like LendingClub, Upstart, and Lightstream often have competitive rates and faster approval timelines. You can also check with your current lender — some will refinance your existing loan with them at a better rate if your credit has improved.
Get quotes from at least three lenders. Each will do a hard credit inquiry, which temporarily lowers your score by a few points, but multiple inquiries within 14 days typically count as a single inquiry for scoring purposes. Compare not just the interest rate but the total cost: the monthly payment, the total interest you'll pay, and all fees combined.
Documents and information you'll need
Have your current loan documents ready — you need the loan balance, the monthly payment amount, and the original loan date. You'll also need the vehicle's current market value. You can estimate this through Kelley Blue Book or NADA Guides by entering the year, make, model, and mileage.
Lenders will ask for proof of income (recent pay stubs or tax returns), proof of residence (a utility bill or lease), and your driver's license. If you're self-employed, you may need to provide two years of tax returns. Have your Social Security number ready for the credit check. Some lenders may ask for proof of insurance on the vehicle.
The refinancing timeline and what happens to your car
Once you're approved, the new lender typically funds the loan within 5 to 10 business days. They send a check directly to your current lender to pay off the old loan. During this time, you keep making payments to your original lender as usual — don't stop paying just because you've applied to refinance. Once the old loan is paid off, the title will be transferred to the new lender's name.
You can drive your car normally throughout this process. The vehicle doesn't change hands, and you don't lose access to it. The only thing that changes is which company holds the lien on the title and who you send your monthly payment to. Your new lender will send you new loan documents and payment instructions once the loan funds.
Situations where refinancing doesn't work
If you're underwater on your loan — meaning you owe more than the car is worth — refinancing becomes harder. Most lenders won't refinance a loan where the amount owed exceeds the vehicle's value, because they have no collateral cushion if you default. Some credit unions and specialized lenders will do this, but at higher rates that may not save you money.
If you're very early in your loan (within the first year), refinancing may not save enough to cover the upfront costs. If you plan to sell or trade in the car within the next year or two, the savings won't have time to materialize. If your credit score is still low or you have recent missed payments, you may not get approved, or you may only be offered rates similar to or higher than your current rate.
Frequently Asked Questions
Will refinancing hurt my credit score?
Yes, but temporarily. The hard inquiry and new account will lower your score by a few points for a few months. However, refinancing also reduces your overall debt load and can improve your credit mix, which helps your score long-term. The temporary dip is usually worth it if you're saving money.
Can I refinance if I'm behind on payments?
Most lenders won't refinance if you have recent missed or late payments. You'll need to be current on your loan for at least a few months before explore. If you're struggling with payments, contact your current lender about a loan modification or deferment instead.
What if my car is worth less than what I owe?
This is called being underwater. Most traditional lenders won't refinance in this situation. Some credit unions and specialized lenders will, but usually at a higher rate. Calculate whether the savings are worth it, and consider whether paying down the principal first makes more sense.
How long does the refinancing process take?
From process to funding typically takes 5 to 10 business days. Approval itself can happen within 24 to 48 hours. The longest part is usually the title transfer at your state's DMV, which can add another week or two depending on your state's processing time.
Do I need to tell my current lender I'm refinancing?
You don't have to, but you can. Your new lender will contact them directly to request payoff information and to pay off the loan. You should keep making payments to your current lender until you receive confirmation that the old loan has been paid off and the new lender is now your servicer.