Refinancing makes sense when your interest rate drops or your financial situation improves
Refinancing a car loan means replacing your current loan with a new one, usually at a lower interest rate or with different terms. You keep the same car and pay off the old loan with money from the new lender. The main reason to refinance is to lower your monthly payment or reduce the total interest you pay over the life of the loan. But refinancing only saves you money if the new rate is meaningfully lower than what you're paying now, and if you keep the car long enough to recoup the costs of refinancing.
The decision to refinance depends on three things: your current interest rate, the rates available to you now, and how much longer you plan to keep the car. If rates have dropped since you took out your original loan, or if your credit score has improved, you may may have access to for a better rate. But if you're planning to sell or trade in the car soon, the savings won't be large enough to justify the refinancing fees.
Key Takeaways
- Refinancing saves money only if the new interest rate is at least one percentage point lower than your current rate, and ideally more.
- Your credit score is the biggest factor in the rate you'll receive—a higher score can unlock significantly lower rates than you had before.
- You need to have paid off at least 20 percent of the original loan before most lenders will refinance, and you must still owe more than the car is worth.
- The break-even point—when your savings exceed refinancing costs—typically takes three to six months, so refinancing only makes sense if you'll keep the car that long.
- Refinancing resets your loan term, so choosing a longer term lowers your payment but costs more in interest overall.
Check if your interest rate has dropped enough to make refinancing worthwhile
The first step is to compare your current rate against what you could get now. Your current rate is on your loan documents or your lender's website. To find out what rates are available to you, check with banks, credit unions, and online lenders. Most will give you a rate estimate without a hard credit inquiry, which means checking won't damage your credit score.
A general rule: refinancing is worth considering if the new rate is at least one percentage point lower than your current rate. If you're paying 8 percent and can get 7 percent, that's worth exploring. If you're paying 8 percent and can only get 7.5 percent, the savings are usually too small to cover refinancing costs. The lower your current rate already is, the harder it becomes to find a meaningfully better one.
Use an online calculator to estimate your actual savings. You'll need your current loan balance, the number of months remaining, your current rate, and the new rate you're being offered. The calculator will show you the difference in total interest paid and the new monthly payment. Subtract the refinancing costs (typically $50 to $300) from that savings to see your real benefit.
Understand how your credit score affects the rates you'll receive
Your credit score is the single biggest factor in the interest rate a lender will offer you. If your score has risen since you took out the original loan—because you've paid bills on time, paid down other debts, or corrected errors on your credit report—you'll may have access to for a lower rate. A 50-point improvement in your score can mean a rate that's 0.5 to 1 percentage point lower.
Check your credit score before you start shopping for refinancing. You can get a free score from many banks, credit card issuers, and websites like Credit Karma or AnnualCreditReport.com. If your score is lower than it was when you got the original loan, refinancing probably won't help you. If it's higher, get rate quotes from at least three lenders to see what's available.
Keep in mind that each lender's rate quote involves a hard credit inquiry, which temporarily lowers your score by a few points. Multiple inquiries within a short window (usually 14 to 45 days, depending on the scoring model) count as a single inquiry, so do your shopping within a two-week period to minimize the impact.
Calculate the break-even point to know if you'll save money
Refinancing has costs: process fees, title transfer fees, and sometimes appraisal fees. These typically range from $50 to $300 total, though some lenders charge nothing. The break-even point is the month when your monthly savings equal the total cost of refinancing. If refinancing costs $200 and your new payment is $30 lower per month, your break-even point is about seven months.
Once you know your break-even point, ask yourself: will I own this car for at least that long? If you're planning to trade it in or sell it within six months, refinancing probably won't pay off. If you plan to keep it for three years or more, refinancing almost always makes financial sense if the rate is lower.
Be honest about your timeline. Many people underestimate how long they'll keep a car. If you're uncertain, assume you'll keep it for at least three more years—that's the average ownership period for most car owners.
Know the lender requirements before you start the process
Not every car loan can be refinanced, and not every borrower will may have access to. Most lenders require that you've paid off at least 20 percent of the original loan balance. If you financed $20,000 and still owe $18,000, you're close to that threshold. If you still owe $19,500, you'll need to wait a few more months.
You also need to owe more than the car is worth—this is called being "right-side up" on the loan. If your car is worth $15,000 and you owe $14,000, you can refinance. If you owe $15,500 on a $15,000 car, most lenders won't touch it. Check your car's value on Kelley Blue Book or NADA Guides using your vehicle's exact year, make, model, and mileage.
The car itself must meet lender requirements: usually no more than 10 years old, under 150,000 miles, and in good condition. Heavily modified cars, salvage titles, or cars with major mechanical issues may not may have access to. Your lender will verify these details during the refinancing process.
Decide whether to keep the same term or change it
When you refinance, you can choose a new loan term. You might refinance a 60-month loan into a new 48-month loan, or stretch a 48-month loan into 60 months. Shortening the term means a higher monthly payment but less total interest paid. Lengthening the term means a lower monthly payment but more total interest paid.
The temptation is to lower your payment by extending the term. But if you're refinancing to save money, extending the term can wipe out most of your savings. If you're refinancing because you need a lower payment right now, extending the term makes sense—just understand that you're trading long-term savings for short-term relief.
A middle path: refinance into a term that ends around the same time as your original loan would have ended. If you have 36 months left on your current loan, refinance into a 36-month loan. You'll get the benefit of the lower rate without resetting your payoff date.
Understand what happens during the refinancing process
Once you've chosen a lender and been approved, the lender pays off your old loan and issues a new one. You'll sign new loan documents, and the lender will handle the title transfer with your state's DMV. This usually takes one to two weeks. During that time, you keep making payments to your old lender as usual—don't stop paying until you receive confirmation that the old loan has been paid off.
Your new lender will send you a new payment schedule and instructions for where to send payments. Your monthly payment amount will change, and your payoff date may shift depending on the new term you chose. Keep your old loan documents until you receive the title in your name with the new lender listed.
If you have a loan through a credit union or a smaller bank, ask whether they offer internal refinancing. Some will refinance your existing loan without requiring you to explore through a third party, which can speed up the process and reduce paperwork.
Frequently Asked Questions
Can I refinance if I'm underwater on my car loan?
Most traditional lenders won't refinance if you owe more than the car is worth. Some credit unions and specialized lenders will, but they typically charge higher rates to offset the risk. Your best option is to wait until you've paid down the loan enough to be right-side up, or to make a lump-sum payment to close the gap.
Will refinancing hurt my credit score?
Refinancing causes a temporary dip in your credit score—usually 5 to 10 points—because of the hard credit inquiry and the new account. Your score recovers within a few months as you make on-time payments on the new loan. The long-term benefit of a lower interest rate outweighs the short-term score impact for most borrowers.
What if my current lender won't let me refinance with someone else?
Lenders can't prevent you from refinancing with another lender. However, some lenders charge a prepayment penalty if you pay off the loan early. Check your original loan documents for this clause. If the penalty is large, factor it into your break-even calculation—it may make refinancing less attractive.
Should I refinance if I only have a year left on my loan?
Probably not. With only 12 months of payments remaining, your break-even point is likely longer than your remaining loan term. You'd spend money on refinancing fees and then pay off the new loan almost when ready. Wait until you're at least 18 to 24 months away from payoff.
Can I refinance a car loan that's in someone else's name?
No. The person whose name is on the title is the only one who can refinance the loan. If you're a co-borrower but not the primary borrower, you'll need the primary borrower to initiate the refinancing. Some lenders allow you to remove a co-borrower during refinancing if your credit and income may have access to on your own.