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 only works if the new lender offers better terms than what you have now. If your credit score has improved since you took out the original loan, or if interest rates have dropped, refinancing can save you real money. If neither of those things is true, refinancing will likely cost you more.
Key Takeaways
- Refinancing makes sense when interest rates have fallen or your credit score has improved enough to may have access to for a lower rate.
- You can refinance through banks, credit unions, or online lenders, and you should compare offers from at least three before deciding.
- The refinancing process takes one to two weeks from process to funding, and your old loan is paid off automatically once the new one closes.
- Refinancing costs nothing upfront, but extending your loan term to lower payments means paying more interest overall.
- Some loans have prepayment penalties that make refinancing more expensive; check your current loan documents before you start.
When refinancing actually saves you money
The most common reason to refinance is a lower interest rate. If you took out your loan when rates were higher, or if your credit score has risen since then, a new lender might offer you a rate that's 1 to 3 percentage points lower. On a $20,000 loan, that difference can mean $100 to $200 less per month.
The second reason is to change your loan term. If you have five years left on a six-year loan and you want to pay it off faster, refinancing into a three-year loan will cost you more per month but less in total interest. The opposite is also true: if money is tight, refinancing into a longer term lowers your monthly payment, but you'll pay significantly more interest by the time the loan ends.
Before you refinance, calculate what you'll actually save. Take your current monthly payment and multiply it by how many months are left on your loan. Then get a quote from a new lender and do the same math with their terms. Subtract the second number from the first. That's your potential savings — but only if you keep the car and don't refinance again.
Where to get a refinance quote
Banks, credit unions, and online lenders all refinance auto loans. Credit unions often have lower rates than banks if you're a member, so start there if you belong to one. If not, banks and online lenders like LendingClub, Lightstream, and SoFi all offer auto refinancing.
Get quotes from at least three lenders before you decide. Each lender will ask for your driver's license, Social Security number, and details about your current loan and the car. They'll pull your credit report, which causes a small temporary dip in your score, but multiple inquiries within 14 days usually count as one inquiry for scoring purposes.
When you compare quotes, look at the interest rate, the monthly payment, and the total amount you'll pay over the life of the loan. A lower rate doesn't always mean the best deal if the term is longer. Ask each lender whether there are any fees — most don't charge origination fees for auto refinancing, but some do.
The refinancing process and timeline
Once you choose a lender and they approve you, the process moves quickly. You'll sign documents electronically or by mail, and the lender will order a title search to confirm you own the car and that there are no other liens on it. This usually takes three to five business days.
After the title search clears, the new lender sends money directly to your old lender to pay off the remaining balance. Your old loan closes, and you start making payments to the new lender. The entire process from process to funding typically takes one to two weeks.
During this time, keep making payments to your old lender on schedule. Don't stop paying just because you've applied to refinance. If the refinance falls through for any reason, you don't want to be late on your current loan.
Prepayment penalties and other costs to watch for
Some auto loans include a prepayment penalty — a fee you pay if you pay off the loan early or refinance it. This penalty is stated in your original loan agreement. Before you refinance, pull out your loan documents and search for the words "prepayment penalty" or "early payoff fee." If one exists, calculate whether the interest you'll save by refinancing is larger than the penalty. If it's not, refinancing doesn't make financial sense.
Refinancing itself has no upfront cost to you. The new lender covers the cost of paying off your old loan. However, some lenders charge an origination fee (usually 1 to 2 percent of the loan amount) or a documentation fee. These are rare for auto refinancing, but ask about them when you get your quote.
If you're underwater on your loan — meaning you owe more than the car is worth — some lenders will still refinance you, but others won't. Those that do may charge a higher interest rate to offset the risk. Check whether you're underwater by comparing what you owe to the car's current market value on Kelley Blue Book or NADA Guides.
How refinancing affects your credit score
When a lender pulls your credit report to give you a quote, your score drops slightly — usually 5 to 10 points. This is called a hard inquiry. If you get quotes from multiple lenders within 14 days, the credit bureaus typically count them as a single inquiry, so the damage is limited to one small dip.
Once you refinance, your score may drop another 5 to 10 points because you now have a new loan account. This is temporary. Your score will recover within a few months as you make on-time payments to the new lender. In the longer term, refinancing to a lower rate and lower payment can actually help your credit if it frees up money to pay down other debts.
Alternatives if refinancing doesn't work for you
If your credit score is too low to refinance at a better rate, or if you have a prepayment penalty that's too high, refinancing may not be worth it. In that case, focus on paying down the principal as fast as you can with your current loan. Any extra money you put toward the loan goes directly to reducing interest.
If you're struggling with your monthly payment, contact your current lender and ask about loan modification. Some lenders will extend your term or adjust your rate without requiring a full refinance. This is less common than it used to be, but it's worth asking about before you give up.
Another option is to sell the car and buy something cheaper if you're significantly underwater. This isn't refinancing, but it can get you out of a bad loan situation faster than waiting years to pay it off.
Frequently Asked Questions
Can I refinance a car loan if I still owe money on it?
Yes. In fact, most people refinance while they still owe money. The new lender pays off the remaining balance on your old loan, and you start fresh with the new one. You don't have to own the car outright.
How many times can I refinance the same car?
There's no legal limit, but most lenders won't refinance you if you've already refinanced the same loan within the past six months. Each refinance costs the lender money and time, so they want to see that you're not shopping around constantly. Refinancing once or twice over the life of a loan is normal; doing it every few months raises red flags.
What happens to my old loan if the new lender approves me?
The new lender automatically pays off the old loan in full. Your old lender sends you a payoff letter confirming the balance is zero, and the title to your car is released from their lien. You'll then receive a new title showing only the new lender's lien, or no lien at all if you paid cash.
Does refinancing hurt my credit score permanently?
No. The initial dip from the credit inquiry and new account is temporary. Your score typically recovers within three to six months as you make on-time payments. Over time, refinancing to a lower rate can actually help your credit if it improves your debt-to-income ratio.
What if I want to refinance but my car is worth less than I owe?
You're underwater, and refinancing is harder but not impossible. Some lenders will refinance underwater loans, but they may charge a higher interest rate or require a larger down payment. Compare offers carefully, because a higher rate might erase any savings you'd get from refinancing.