What refinancing an auto loan means
Refinancing an auto loan means replacing your current loan with a new one 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 goal is usually to lower your monthly payment, reduce the interest rate, or shorten how long you'll be paying.
This works because your credit score, income, or the car's value may have changed since you first borrowed. A lender might offer you better terms now than you had before. You're not borrowing more money — you're borrowing the same amount under different conditions.
Key Takeaways
- Refinancing makes sense if your credit score has improved, interest rates have dropped, or you want to change your loan length.
- You'll need your current loan details, proof of income, and the vehicle's current value to shop with new lenders.
- 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 keep driving your car the whole time.
- Refinancing costs money upfront — title transfer fees, document fees, and sometimes prepayment penalties — so calculate whether the savings justify the cost.
When refinancing saves you money
Refinancing works best when your interest rate drops. If you originally borrowed at 8% and can now get 5%, the difference adds up over time. Even a 1% or 2% drop on a $20,000 loan can save hundreds of dollars in interest.
Your credit score is the main reason rates change. If your score has risen since you took out the original loan — because you've paid bills on time, reduced other debt, or fixed errors on your report — lenders will offer you better rates. You can check your score for free through AnnualCreditReport.com, which is the official government site.
Refinancing also makes sense if you want to change the loan term. If you have five years left on a six-year loan and want to pay it off faster, refinancing into a three-year loan accelerates the payoff. Conversely, if money is tight, refinancing into a longer term lowers your monthly payment, though you'll pay more interest overall.
Costs you'll pay to refinance
Refinancing is not free. You'll encounter several fees that reduce your savings. Title transfer fees vary by state — some charge $50 to $200 to register the new lender's lien on the title. Document or processing fees from the new lender typically run $50 to $300.
Your original lender may charge a prepayment penalty if you pay off the loan early. Not all lenders charge this, but it's common. The penalty might be a flat fee ($200 to $500) or a percentage of the remaining balance. Check your original loan documents or call your current lender to ask.
Before you refinance, calculate the total savings. If refinancing will save you $2,000 in interest but costs $400 in fees, your net savings is $1,600. If the savings are only $300 and fees are $400, refinancing costs you money and doesn't make sense.
Where to get a refinance loan
Banks, credit unions, and online lenders all offer auto refinancing. Credit unions often have lower rates than banks, especially if you're a member, but you have to join first. Some credit unions let you open membership for a small fee ($5 to $25) if you don't already belong.
Online lenders like LendingClub, Upgrade, and SoFi let you check rates without a hard credit inquiry first — meaning you can shop around without damaging your score. Banks like Wells Fargo, Chase, and Bank of America offer refinancing but may have stricter requirements. Local or regional banks sometimes have better rates than national chains.
Get quotes from at least three lenders. Rates vary based on your credit score, income, the car's age and mileage, and how much you still owe. Comparing quotes takes 15 to 30 minutes per lender and can reveal differences of 1% to 3% in interest rate.
Documents and information you'll need
Have your current loan paperwork ready. You'll need the loan account number, the lender's name, and the exact amount you still owe. Call your current lender or log into your account online to find this.
Bring proof of income — usually a recent pay stub or tax return — and a government-issued ID. The new lender will also want to know the car's current value. You can get a free estimate from Kelley Blue Book (kbb.com) or NADA Guides (nadaguides.com) by entering the year, make, model, and mileage.
Have your insurance information available. Most lenders require proof that the car is insured before they'll fund the refinance. Your current insurance policy or a declaration page from your insurer will work.
The refinancing timeline and process
Once you're approved, the new lender contacts your current lender to request a payoff quote. This quote shows exactly how much you owe on a specific date. The new lender then pays that amount directly to your old lender, and your old loan closes.
You'll receive new loan documents to sign. These show the new interest rate, monthly payment, and loan term. Sign and return them — most lenders now accept electronic signatures, so you don't have to mail anything. The whole process from process to funding typically takes one to two weeks.
During this time, you keep making payments to your current lender as usual. Once the new lender funds the loan and pays off the old one, you'll stop receiving bills from the old lender and start receiving them from the new one. Your car's title will be updated to show the new lender's lien, which happens automatically in most states.
Reasons refinancing might not work for you
If your credit score is low or hasn't improved since you took out the original loan, refinancing won't lower your rate. Lenders base rates on creditworthiness, and if yours hasn't changed, neither will your offer. In this case, focus on paying down the balance and rebuilding credit before trying again.
If you're underwater on the loan — meaning you owe more than the car is worth — refinancing is difficult. Most lenders won't refinance a loan where the amount owed exceeds the car's value, because they have less security if you default. Some credit unions and specialized lenders will, but at higher rates.
If your car is very old (typically over 10 years) or has very high mileage (over 150,000 miles), fewer lenders will refinance it. The car's value drops sharply with age and mileage, making it riskier collateral. Check with your current lender or a credit union first, as they're often more flexible.
Frequently Asked Questions
Will refinancing hurt my credit score?
Refinancing causes a small, temporary dip in your credit score because the new 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 typically outweighs this temporary impact.
Can I refinance if I'm behind on payments?
Most lenders won't refinance if you're currently behind or have missed payments in the last few months. Some credit unions may work with you if you've caught up and can show a few months of on-time payments. Contact your current lender first to discuss your options before approaching other lenders.
What happens to my old loan documents after refinancing?
Your old lender will send you a final statement showing the loan is paid in full. Keep this for your records. The title to your car will be updated to show the new lender's lien instead of the old one — this happens automatically and you don't need to do anything.
Can I refinance multiple times?
Yes, you can refinance more than once if rates drop again or your credit improves further. However, each refinance costs money in fees and causes a small credit score dip, so it only makes sense if the savings are substantial. Most people refinance once or twice over the life of a loan.
What if my car is worth less than I owe?
Being underwater makes refinancing harder but not impossible. Credit unions are more likely to refinance underwater loans than banks. You might also wait until you've paid down the balance enough that you owe less than the car's value, then refinance. In the meantime, focus on making extra payments if you can.