What refinancing a car means
Refinancing a car means taking out a new loan to pay off your existing car loan. The new lender pays off what you still owe on the old loan, and you then make monthly payments to the new lender instead. The goal is usually to lower your monthly payment, reduce the total interest you pay, or both — though sometimes people refinance to change the loan term or move away from a problematic lender.
This is different from trading in your car or selling it. You keep the same vehicle. The only thing that changes is who holds the loan and what the terms are.
Key Takeaways
- Refinancing works best when interest rates have dropped since you took out your original loan, or when your credit score has improved enough to may have access to for better terms.
- You will need your current loan balance, vehicle information, and proof of income to start the refinancing process with a new lender.
- The new lender pays off your old loan directly, so you do not have to manage two payments — but you will have a new loan agreement with different terms.
- Refinancing costs money upfront (title transfer fees, appraisal fees, sometimes origination fees), so you should calculate whether the monthly savings justify the cost.
- Your vehicle's value matters: if you owe more than the car is worth, most lenders will not refinance, or will only do so at a higher interest rate.
When refinancing actually saves you money
Refinancing saves money when the new interest rate is lower than your current rate, or when you extend the loan term enough that your monthly payment drops significantly. If interest rates in the market have fallen since you got your original loan, or if your credit score has improved, you may now may have access to for a better rate than before.
However, refinancing costs money upfront. You will typically pay a title transfer fee (usually $50 to $300, depending on your state), and some lenders charge an origination fee or appraisal fee. If you are only saving $30 a month, it will take many months to break even on a $200 origination fee. Use a refinancing calculator — most credit unions and online lenders offer them free — to compare your current loan against the new offer and see how many months it takes to recoup the upfront costs.
Refinancing also makes sense if you are unhappy with your current lender — for example, if they have poor customer service or if you want to move your loan to a credit union you recently joined.
How to find a lender and compare offers
You can refinance through a bank, credit union, or online lender. Credit unions often offer lower rates to members, so if you belong to one, start there. Online lenders like LendingClub, Upgrade, and Lightstream let you compare rates without a hard credit inquiry first (a soft inquiry does not affect your credit score). Banks like Wells Fargo and Chase also refinance cars, though their rates vary widely.
When you contact a lender, have your current loan information ready: the loan balance, the interest rate you are paying now, the vehicle's year and make, and the mileage. The lender will give you a rate quote, usually within a few minutes for online lenders. Compare at least three offers before deciding. Pay attention not just to the interest rate, but to the loan term (how many months you will pay), any fees, and whether the rate is fixed or variable.
Some lenders will prequalify you without a hard credit pull, which lets you shop around without damaging your credit score. Once you choose a lender and formally explore, they will do a hard inquiry, which temporarily lowers your score by a few points — but multiple hard inquiries within 14 days usually count as one inquiry, so do your shopping quickly.
The refinancing process, step by step
Once you have chosen a lender and been approved, the process moves quickly. The new lender will order a title search and may order an appraisal of your vehicle to confirm its value. You will sign loan documents — either in person at a branch or electronically online, depending on the lender.
The new lender then pays off your old loan directly. You do not send them money; they handle the payoff. Your old lender will release the title (or lien) once they receive the payment. You will then receive new loan documents and a new payment schedule from the new lender. Your first payment to the new lender is usually due 30 to 45 days after the loan closes.
The entire process typically takes one to two weeks from approval to funding, though online lenders can sometimes close in as little as three to five business days. During this time, you continue making payments to your old lender as usual — do not stop paying until you receive confirmation that the old loan has been paid off.
What can disqualify you or make refinancing harder
If you owe more than your car is worth (called being "upside down" on the loan), refinancing becomes difficult. Most lenders will not refinance in this situation, or will only do so at a much higher interest rate. You can check your car's value using Kelley Blue Book or NADA Guides and compare it to your loan balance.
A low credit score can also make refinancing impossible or very expensive. If your score has not improved since you took out the original loan, you may not may have access to for a better rate — and refinancing might actually cost you more. Lenders typically want a credit score of at least 620, though better rates usually require 700 or higher.
High mileage (usually above 100,000 miles) or a vehicle that is very old can make lenders hesitant to refinance, because the car is worth less and is more likely to need expensive repairs. Some lenders have age limits — for example, they will not refinance cars older than 10 years.
Refinancing versus other options
If refinancing is not possible or does not make financial sense, you have other choices. You can straightforward keep paying your current loan as is — there is no requirement to refinance. If your monthly payment is too high, you could try negotiating with your current lender to extend the loan term, though this will cost you more in total interest.
If you are struggling with the payment, some lenders offer loan modification programs that can lower your payment temporarily. Contact your current lender and ask if they have hardship programs available.
Another option is to sell the car and buy a cheaper one outright or with a smaller loan. This is a bigger decision and involves more work, but it can reduce your overall debt if you are in a difficult financial situation.
What happens to your old loan and title
When the new lender pays off your old loan, your old lender will send you a release of lien or a paid-off notice. This document proves the loan is closed. The title to your car will be transferred to the new lender's name (they hold the lien until you pay off the new loan). You do not need to do anything — the new lender handles the title transfer with your state's Department of Motor Vehicles.
Keep the paid-off notice and any title documents for your records. You may need them if you ever sell the car or if there is a dispute about the loan status.
Frequently Asked Questions
Will refinancing hurt my credit score?
A hard credit inquiry will lower your score by a few points temporarily, usually recovering within a few months. However, refinancing can actually help your credit long-term if the new loan has a lower interest rate and you pay it on time, because you will be paying less interest overall and demonstrating responsible borrowing.
Can I refinance if I still owe money on my car?
Yes — in fact, you almost always refinance while you still owe money. You refinance to get a better rate on the remaining balance. You cannot refinance a car you own outright with no loan.
How long does refinancing take?
Most lenders close a refinance loan within one to two weeks of approval. Online lenders can sometimes close in three to five business days. During this time, continue making payments to your old lender as scheduled.
What if my car is worth less than I owe?
This makes refinancing very difficult. Most lenders will decline, or will only refinance at a much higher interest rate. You can try credit unions or specialized lenders, but expect limited options. In this situation, keeping your current loan may be your best choice.
Do I have to refinance with the same type of lender?
No. You can refinance from a bank to a credit union, from a dealership loan to an online lender, or any other combination. The new lender only cares about the car's value and your creditworthiness, not where the original loan came from.