What car refinancing means and why people do it
Car refinancing means taking out a new loan to pay off your existing car loan. The new lender pays off what you still owe, and you start making payments to them instead. People refinance when interest rates drop, when their credit score has improved since they bought the car, or when they want to change the length of their loan to lower their monthly payment.
The goal is usually to save money on interest, reduce your monthly payment, or both. If you refinanced five years ago at 8% interest and rates have fallen to 5%, refinancing could cut hundreds of dollars from what you'll pay over the life of the loan. But refinancing costs money upfront — process fees, title transfer fees, and sometimes prepayment penalties on your current loan — so it only makes sense if you'll save more than you spend.
Key Takeaways
- Local credit unions and banks often offer better rates than national lenders, so checking both your own bank and credit unions in your area is a necessary first step.
- You need your current loan details (balance, interest rate, monthly payment) and your credit score before you contact any lender, so you can compare offers accurately.
- Getting quotes from multiple lenders takes a few hours but can save you thousands in interest, and most lenders can tell you within minutes whether you may have access to.
- Prepayment penalties on your current loan can wipe out your savings, so ask your current lender about penalties before you explore elsewhere.
Where to find refinance lenders near you
Start with your current lender — your bank or credit union — because they already have your information and may offer existing-customer discounts. Call them and ask if they refinance auto loans and what rates they're offering. If you're not happy with the rate, move on to other local credit unions and banks.
Credit unions often beat banks on rates because they're member-owned and don't answer to shareholders. If you belong to a credit union, that's usually your best starting point. If you don't, you can search for credit unions in your area through the CO-OP Network or Alliant Credit Union's branch locator, and many will let you join if you live or work in their service area or meet other membership criteria.
National online lenders like LendingClub, Upgrade, and SoFi operate in most states and let you get a quote without visiting a branch. These lenders can move quickly, but their rates aren't always better than local options — you have to compare. Local car dealerships sometimes offer refinancing through captive finance companies (like Ford Credit or GM Financial), but these are rarely the cheapest option.
What information you need before you contact lenders
Gather these details before you start calling or filling out online forms. You'll need your current loan balance (the amount you still owe), your current interest rate, your monthly payment, and how many months are left on the loan. This information is on your loan statement or you can call your current lender and ask.
You'll also need your credit score. You can check it free through AnnualCreditReport.com (the official government site), through your bank or credit card company, or through free services like Credit Karma or NerdWallet. Your score matters because it determines what rate you'll be offered — the higher your score, the lower the rate.
Finally, know your vehicle's value. You can look it up on Kelley Blue Book or NADA Guides using your car's year, make, model, and mileage. Lenders won't refinance a car for more than it's worth, so if you're underwater on your loan (owe more than the car is worth), refinancing won't be an option.
How to compare offers from different lenders
When you get quotes, compare the interest rate, the loan term (how many months you'll pay), and the total amount you'll pay over the life of the loan. A lower monthly payment might sound good, but if it stretches the loan from 48 months to 72 months, you could end up paying more interest overall.
Ask each lender about fees upfront. Most charge an process fee (usually $0 to $100), and some charge a title transfer fee or processing fee. Some lenders roll these into the loan, so you don't pay them out of pocket, but you do pay interest on them. Others require you to pay them when you explore. Factor these into your total cost.
Use an auto refinance calculator to see how much you'll save. Enter your current loan balance, your current rate, and the new rate you've been quoted, and the calculator will show you how much interest you'll save. Subtract the fees from that number — that's your real savings. If it's less than $500, refinancing probably isn't worth the hassle.
Checking for prepayment penalties on your current loan
Before you refinance, call your current lender and ask whether your loan has a prepayment penalty. This is a fee you pay if you pay off the loan early. Some lenders charge a flat fee (like $200), others charge a percentage of the remaining balance, and some charge no penalty at all.
If your loan has a prepayment penalty, add that cost to the refinance fees when you calculate your savings. A $300 prepayment penalty plus a $100 process fee means you need to save at least $400 in interest for refinancing to make sense. If your current lender won't tell you whether there's a penalty, check your original loan documents — the penalty, if it exists, will be listed there.
The refinance timeline and what happens next
Once you've chosen a lender, the process usually takes two to four weeks. You'll fill out an process (online or in person), and the lender will order a vehicle inspection and title search. They'll verify your income and run a hard credit check, which temporarily lowers your credit score by a few points.
When the lender approves you, they'll pay off your old loan and send you new loan documents. You'll sign these and return them. The lender then files the title transfer with your state's motor vehicle department. During this time, you keep making payments to your old lender until they confirm the loan is paid off.
Once everything is complete, you'll start making payments to your new lender. The whole process is handled by the lenders — you don't have to visit a DMV or courthouse. Your only job is to provide documents when asked and sign the final paperwork.
When refinancing doesn't make sense
Don't refinance if you're underwater on your loan (owe more than the car is worth). Most lenders won't refinance in this situation, and those who will charge much higher rates because the risk is higher for them.
Don't refinance if you're planning to sell or trade in the car within the next year or two. The fees and the time it takes to process the refinance mean you won't save enough money to make it worthwhile. Also, don't refinance if your current loan is almost paid off — the interest you'll save won't cover the fees.
If your credit score has dropped since you took out your current loan, refinancing might get you a worse rate than you have now. Check your score before you explore, and if it's lower than it was when you got your current loan, wait and work on improving it before you refinance.
Frequently Asked Questions
Do I have to refinance with a lender in my state?
No. Most national online lenders operate in all 50 states, and credit unions in other states may refinance your car if you meet their membership requirements. However, your state's motor vehicle department will handle the title transfer, so you'll need to follow your state's process regardless of where the lender is located.
Will refinancing hurt my credit score?
Refinancing causes a small, temporary drop in your credit score when the lender runs a hard credit check. This usually recovers within a few months. If you explore to multiple lenders within a short period (a few days to two weeks), the inquiries count as one, so space out your applications if you're concerned about the impact.
Can I refinance a car I'm still paying off?
Yes, that's the whole point of refinancing. You refinance while you still owe money on the car. The new lender pays off what you owe to your old lender, and you start paying the new lender instead.
What if I have bad credit?
Refinancing with bad credit is harder and usually means a higher interest rate, so you may not save money. Some credit unions and online lenders work with borrowers who have lower credit scores, but their rates will reflect the risk. Check your score first — if it's below 600, refinancing may not save you anything.
How often can I refinance?
There's no legal limit on how many times you can refinance, but lenders may be hesitant to refinance a car you've already refinanced multiple times. Most people refinance once or twice over the life of a loan. Refinancing more than that suggests you're chasing lower payments rather than actually saving money.