What refinancing an auto loan means
Refinancing an auto 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. The main reason people refinance is to lower their interest rate — which means smaller monthly payments or paying off the car faster without changing your payment amount.
You keep the same car and the same payoff timeline (unless you choose to change it). What changes is the lender, the interest rate, and sometimes the monthly payment. Refinancing costs money upfront — there are process fees, appraisal fees, and title transfer fees — so it only makes sense if the interest rate drop is large enough to cover those costs and still save you money over time.
Key Takeaways
- Refinancing makes sense when your new interest rate is at least 1 to 2 percentage points lower than your current rate, because lower rates save you more than the upfront fees cost.
- Your credit score, income, and how much you still owe on the car all affect whether a lender will refinance you and what rate they will offer.
- Banks, credit unions, and online lenders all refinance auto loans, and comparing offers from at least three lenders takes a few hours and costs nothing.
- The refinancing process takes one to two weeks from process to funding, and you keep driving your car the whole time.
When refinancing actually saves you money
The math on refinancing is straightforward: the interest rate drop has to be large enough to pay back the fees you will owe. Most lenders charge between $200 and $500 in fees, though some credit unions charge less. If your current rate is 8% and you can refinance at 6%, that 2-percentage-point drop is usually worth it. If your current rate is 6% and you can only get 5.5%, the savings might not cover the fees.
The longer you have left to pay on the loan, the more you save by lowering the rate. If you have 48 months left and you drop your rate by 2 percentage points, you save hundreds of dollars. If you have 12 months left, the savings are smaller — sometimes too small to justify the fees. Use an online auto loan calculator to plug in your current balance, rate, and months remaining, then compare it to what the new loan would cost. That number tells you whether refinancing is worth doing.
Refinancing also makes sense if your credit score has improved since you took out the original loan. Lenders offer better rates to borrowers with higher credit scores. If you had a score of 600 when you got your current loan and it is now 700, you may may have access to for a much lower rate than you could get before.
Who will refinance your auto loan
Banks, credit unions, and online lenders all refinance auto loans. Banks are the most common choice — most people start by calling their own bank to ask about refinancing. Credit unions often have lower rates than banks, but you have to be a member. If you are not a member of a credit union, you can sometimes join one based on where you work, where you live, or a group you belong to. Online lenders like LendingClub, Upgrade, and Lightstream refinance auto loans and often have faster approval than banks.
The interest rate you are offered depends on your credit score, your income, how much you still owe on the car, and how old the car is. Most lenders will not refinance a car that is more than 10 years old or has more than 150,000 miles, though this varies. The car itself has to be worth more than what you still owe — if you owe $15,000 and the car is worth $12,000, most lenders will turn you down.
How to compare refinancing offers
Start by gathering information about your current loan: your lender's name, your current interest rate, your current monthly payment, your remaining balance, and how many months you have left to pay. You will need this for every lender you contact.
Contact at least three lenders — your bank, a credit union if you are a member, and one online lender. Tell each one you want a rate quote for refinancing. Most will ask for your Social Security number, income, and employment information. A rate quote does not commit you to anything and does not hurt your credit score (as long as you do all your shopping within two weeks, which counts as a single inquiry).
When you get quotes back, compare the interest rate, the monthly payment, the total amount you will pay over the life of the loan, and the fees. Some lenders advertise a low rate but charge high fees. Others charge low fees but offer a higher rate. The total cost to you is what matters, not any single number. Write down the offer from each lender so you can see them side by side.
The refinancing process from start to finish
Once you choose a lender, you will fill out a full process. This is more detailed than the rate quote — you will provide tax returns, pay stubs, bank statements, and proof of insurance. The lender will order an appraisal of your car to confirm it is worth what you said it is. This usually takes three to five business days.
After the appraisal comes back, the lender will give you a final approval and send you documents to sign. These include the new loan agreement, a truth-in-lending statement (which shows the interest rate, fees, and total cost), and sometimes a power of attorney that lets the lender handle the title transfer. You sign these and send them back — most lenders let you sign electronically now.
Once the lender has your signed documents, they contact your current lender and request a payoff quote. Your current lender tells them exactly how much you owe as of a specific date. The new lender sends that money to your old lender, and your old loan is closed. You then start making payments to the new lender. The whole process takes one to two weeks from the day you submit your process.
What happens to your car title during refinancing
Your car's title — the document that proves you own the car — stays with your lender as long as you have a loan. When you refinance, the title transfers from your old lender to your new lender. You do not have to do anything yourself; the lenders handle this. The title will be mailed to your new lender's address, and you will not see it until the loan is paid off.
If you have a lien on the title (which means your old lender has a legal claim to the car until the loan is paid), that lien is removed when the new lender pays off the old loan. The new lender then puts their own lien on the title. Again, this all happens behind the scenes — you keep driving the car the whole time.
Reasons refinancing might not work for you
If your credit score is low, lenders may not refinance you at all, or they may offer a rate that is higher than what you currently have. In that case, refinancing does not make sense. If you are underwater on your loan (you owe more than the car is worth), most lenders will turn you down. Some credit unions will refinance underwater loans, but it is rare.
If you are close to paying off the car — say, you have six months left — the interest you would save by refinancing is probably too small to cover the fees. If your current rate is already very low (below 4%), finding a lender willing to go lower is difficult. If you have missed payments or are behind on your current loan, lenders will likely deny you until you catch up.
If you are planning to sell or trade in the car soon, refinancing does not make sense because you will not have time to recoup the fees. The new lender will want the car paid off when you sell it, which means you would have to pay the remaining balance out of pocket or use the sale proceeds.
Frequently Asked Questions
Does refinancing hurt my credit score?
Refinancing causes a small, temporary drop in your credit score because lenders do a hard inquiry into your credit report. This drop is usually 5 to 10 points and recovers within a few months. The benefit of a lower interest rate typically outweighs this temporary dip. If you shop for rates within two weeks, all the inquiries count as one, so you only take one hit.
Can I refinance if I still owe more than the car is worth?
Most traditional lenders will not refinance if you are underwater. Some credit unions have programs for this, but they are uncommon. Your best option is to wait until you have paid down the loan enough that you owe less than the car's value, then refinance.
What if my current lender charges a prepayment penalty?
Some loans include a prepayment penalty — a fee you owe if you pay off the loan early. Check your loan documents to see if yours does. If it does, add that penalty to your refinancing costs when you calculate whether refinancing saves you money. Many lenders will not refinance you if a large penalty applies.
How long does the whole refinancing process take?
From the day you submit your process to the day the new lender funds the loan and pays off your old one is usually one to two weeks. The appraisal takes the longest — three to five business days. You can drive your car the entire time and do not have to do anything except sign documents and return them.
Can I change my loan term when I refinance?
Yes. If you currently have 36 months left and you refinance, you can choose a new loan for 36 months, 48 months, 60 months, or whatever the lender offers. A longer term means a smaller monthly payment but more total interest paid. A shorter term means a higher payment but less interest overall. The lender will show you the payment for each option.