Refinancing makes sense when your interest rate drops or your credit score improves enough to get a better rate
Refinancing an auto loan means replacing your current loan with a new one, usually from a different lender. The new loan pays off the old one completely, and you start making payments to the new lender instead. The main reason people refinance is to lower their interest rate, which reduces how much you pay in total interest over the life of the loan.
Whether refinancing makes financial sense depends on three things: how much lower your new rate would be, how much longer you plan to keep the car, and what fees the new lender charges. If your new rate is only slightly lower, the savings might not cover the process fee or title transfer costs. If you plan to sell or trade in the car in six months, you probably won't save enough to make it worthwhile.
Key Takeaways
- Refinancing typically saves money only if your new interest rate is at least 0.5 to 1 percentage point lower than your current rate.
- Your credit score is the biggest factor lenders look at when deciding your new rate, so check your score before you start shopping.
- The longer you plan to keep the car, the more time you have to benefit from a lower rate, making refinancing more worthwhile.
- Compare the total cost of refinancing — including process fees, title transfer fees, and any prepayment penalties on your current loan — against your projected savings.
- You can refinance through banks, credit unions, or online lenders, and rates vary significantly between them.
When a lower credit score or recent life changes blocked you from a good rate the first time
Many people take out an auto loan when their credit is damaged or uncertain. A divorce, job loss, or missed payment can push your score down temporarily. If that happened to you, your original rate might have been high because the lender saw you as risky. Now, if your score has recovered — through on-time payments, paying down other debts, or straightforward waiting for old negative marks to age — a new lender may offer you a much better rate.
Check your credit score before you contact any lender. You can get a free score from AnnualCreditReport.com, Credit Karma, or your bank's website. A score improvement of 50 to 100 points can mean the difference between a 7% rate and a 4% rate. The larger the gap between your old rate and what you could get now, the more sense refinancing makes.
How to calculate whether the math actually works in your favor
Refinancing saves you money only if the interest you avoid exceeds the costs of refinancing. Here is how to do the math yourself.
First, find out what your new rate would be. Contact at least three lenders — a bank, a credit union, and an online lender — and ask for a rate quote. Most will give you a preliminary rate without a hard credit check. Write down the rate, the loan term (how many months), and any fees they mention.
Next, calculate your monthly payment under the new loan using an auto loan calculator. Subtract that from your current monthly payment. Multiply the difference by the number of months remaining on your current loan. That number is your gross savings — the interest you would avoid if there were no costs.
Now subtract the refinancing costs: process fee (usually $0 to $300), title transfer fee (varies by state, typically $50 to $200), and any prepayment penalty on your current loan (check your loan documents). If your gross savings exceed these costs and you plan to keep the car long enough to realize those savings, refinancing makes sense.
Example: Your current payment is $350 per month at 6.5%, with 36 months left. A new lender offers 4.5% for 36 months, which would be $310 per month. Your monthly savings is $40. Over 36 months, that is $1,440 in gross savings. If refinancing costs $400 total, your net savings is $1,040. That is worth doing. But if the new rate is only 6%, your monthly savings drops to $10, or $360 total over 36 months — less than your costs.
Why the length of your loan term matters more than you might think
When you refinance, you can choose a new loan term. Many people extend the term — say, from 36 months remaining to 60 months — because it lowers the monthly payment. But extending the term usually costs you money in the long run, even with a lower interest rate.
Here is why: you are spreading the remaining balance over more months, so you pay more interest overall. A lower rate helps, but it does not always offset the extra interest from the longer term. The best refinancing deal is usually one where you keep the same term or shorten it.
If your only goal is to lower your monthly payment and you do not care about total interest paid, extending the term makes sense. But if you want to save money overall, keep the term the same or shorter than your current loan.
Banks, credit unions, and online lenders all have different rates
Your current lender is not the only place to refinance. Banks, credit unions, and online lenders all offer auto refinancing, and their rates vary widely — sometimes by 1 to 2 percentage points.
Credit unions often have lower rates than banks, especially if you are a member. If you are not a member of a credit union, you may be able to join one through your employer, your school, or a community organization. Membership usually costs nothing or a small one-time fee.
Online lenders like LendingClub, Upgrade, and SoFi offer fast approval and funding, sometimes within a few days. Banks take longer but may have lower rates if you already bank there. Get quotes from at least three lenders before deciding. Each quote will show you the rate, the monthly payment, and the total interest you would pay over the life of the loan.
What happens to your current loan and your car title during the process
When you refinance, the new lender pays off your current loan in full. You do not have to contact your current lender yourself — the new lender handles that. Your current lender will release the lien on your car (the legal claim they hold because you owe them money), and the new lender will file a new lien in their name.
This process takes one to two weeks. During that time, you still own the car and can drive it. You will receive a new loan document and a new payment coupon or online payment portal from the new lender. Your car title will be updated to show the new lender's lien, but you will not need to do anything — the lenders and your state's motor vehicle department handle the paperwork.
Make sure you understand your current loan's prepayment penalty before you refinance. Some loans charge a fee if you pay them off early. Check your loan documents or call your current lender and ask directly. If there is a penalty, factor it into your refinancing cost calculation.
Red flags that refinancing is not the right move for you right now
Do not refinance if you are underwater on your loan — meaning you owe more than the car is worth. Most lenders will not refinance an underwater loan, and if they do, the new loan will still be underwater, leaving you in a worse position if the car breaks down or is totaled.
Do not refinance if you are planning to sell or trade in the car within the next year or two. The savings will not have time to add up, and you will have paid refinancing costs for nothing.
Do not refinance if your credit score has not improved since you took out the original loan. If your score is still low, new lenders will offer rates similar to or worse than what you have now. Wait until your score improves before you shop around.
Do not refinance multiple times in a short period. Each refinancing involves a hard credit inquiry, which temporarily lowers your score. Multiple inquiries in a few months can damage your credit further and make future refinancing more expensive.
Frequently Asked Questions
Will refinancing hurt my credit score?
Refinancing involves a hard credit inquiry, which typically lowers your score by 5 to 10 points temporarily. The impact fades within a few months, especially if you make on-time payments on your new loan. The long-term benefit of a lower interest rate usually outweighs this temporary dip.
Can I refinance a car I still owe money on?
Yes. As long as you owe less than the car is worth, you can refinance. The new lender pays off your current loan, and you start making payments to them. You must own the car outright or have the lender's permission to refinance if they hold the title.
How long does refinancing take?
Getting approved and funded usually takes three to seven business days. The new lender pays off your old loan within one to two weeks. You can drive the car the whole time. You will start making payments to the new lender once the loan is funded.
What if I have a very high interest rate right now?
A very high rate (8% or above) is a strong sign that refinancing could save you significant money, especially if your credit has improved. Even a small rate drop — from 9% to 7%, for example — can save hundreds of dollars. Get quotes from multiple lenders to see what you may have access to for.
Can I refinance if I have missed payments on my current loan?
Most lenders will not refinance if you have missed a payment in the last 12 months. If you have missed payments, focus on making on-time payments for at least a year before you shop for refinancing. This will improve your credit score and make you a more attractive borrower.