Refinancing a car means replacing your current loan with a new one, usually at a different interest rate or term
When you refinance, you pay off your existing car loan with money from a new lender, then make payments to that new lender instead. The new loan might have a lower interest rate, a shorter payoff period, a longer payoff period, or some combination of those. Whether it makes sense depends entirely on your current situation, your credit score now versus when you first borrowed, and what you actually want the monthly payment to do.
Refinancing is not free. You will pay an process fee (typically $50 to $300), and the new lender will run a hard credit inquiry, which temporarily lowers your credit score by a few points. Some lenders also charge document fees or title transfer fees. You need to know these costs upfront so you can calculate whether the interest you save actually exceeds what you pay to refinance.
Key Takeaways
- Refinancing makes financial sense only if the interest rate on the new loan is meaningfully lower than your current rate, and you keep the car long enough to recoup the refinancing fees.
- Your credit score is the single biggest factor: if your score has improved since you took out the original loan, you may now may have access to for a better rate.
- Extending the loan term lowers your monthly payment but costs you more in total interest over the life of the loan.
- The break-even point — when interest savings exceed refinancing costs — typically takes six months to two years, depending on how much you save per month.
- Refinancing does not change what you owe on the car itself, only who you owe it to and under what terms.
When refinancing usually saves you money
The most common reason to refinance is a lower interest rate. If you originally borrowed at 8% and can now refinance at 5%, you will pay less interest over the remaining life of the loan. The larger the gap between your old rate and new rate, and the more time left on the loan, the more you save.
Your credit score is the main reason your rate might be lower now. If your score has risen since you took out the original loan — because you have paid bills on time, paid down other debts, or corrected errors on your credit report — lenders will offer you better terms. A score improvement of 50 to 100 points can drop your rate by 1 to 2 percentage points, which translates to real savings on a car loan.
Use a straightforward calculator to find your break-even point. Subtract the refinancing fees from the total interest you will save over the remaining loan term. If that number is positive and you plan to keep the car past that point, refinancing makes sense. For example: if you save $1,200 in interest but pay $200 in fees, your break-even is $200. After that, every dollar saved is money in your pocket.
When refinancing costs more than it saves
If your credit score has not improved, or if you are refinancing with a subprime lender (one that specializes in borrowers with poor credit), your new rate may be the same or higher than your current rate. In that case, refinancing only makes sense if you need to restructure the loan — for instance, if you are struggling with the current payment and need to extend the term, even though it will cost you more in total interest.
Refinancing also does not make sense if you plan to sell or trade in the car soon. If you have only 18 months left on the loan and you plan to get rid of the car in two years, you will not have time to recoup the refinancing fees through interest savings. The fees become a pure cost with no benefit.
Be cautious about extending the loan term to lower your payment. A 60-month loan refinanced into a 72-month loan will reduce your monthly payment, but you will pay significantly more interest overall. This strategy only makes sense if you genuinely cannot afford the current payment and have no other option.
How to find out what rate you might may have access to for
Start by checking your credit score through a free service like AnnualCreditReport.com or through your bank or credit card issuer. Most lenders will show you an estimated rate without a hard inquiry — this is called a soft inquiry and does not affect your score. Use this to compare offers from banks, credit unions, and online lenders.
Credit unions often offer competitive rates, especially if you are a member. Banks will refinance cars they did not originally finance. Online lenders like LendingClub, Upgrade, and SoFi also offer auto refinancing, though their rates vary widely based on credit score and loan amount.
Gather your current loan documents before you shop. You will need the loan balance, the interest rate, the remaining term, and the vehicle identification number (VIN). Lenders will also want to know the current market value of the car — you can check Kelley Blue Book or NADA Guides for this. If you owe more than the car is worth (you are "upside down"), some lenders will still refinance, but fewer options will be available to you.
The actual steps to refinance
Once you have found a lender and been approved, the lender will contact your current lender to get the exact payoff amount. This is important because your loan balance changes slightly each day as interest accrues. The new lender will then send you documents to sign, usually electronically.
After you sign, the new lender pays off your old loan in full. The title to your car will be transferred from the old lender to the new lender (or released if you own the car outright). You will then make payments to the new lender according to the new loan terms. This entire process typically takes one to two weeks from approval to first payment.
During this transition, make sure you understand when your first payment to the new lender is due. Do not miss a payment to either lender during the switchover. If you have automatic payments set up with your old lender, cancel them once the refinance is complete to avoid paying twice.
Refinancing versus other options
If you are refinancing because you cannot afford your current payment, refinancing is not your only option. You can ask your current lender about a loan modification, which restructures your existing loan without the fees of refinancing. Some lenders will do this, though it is less common than it was during the pandemic.
If the car is worth significantly less than you owe, or if you are having trouble making payments, you might consider selling the car and using the proceeds to pay down the loan, then buying a cheaper used car outright or with a smaller loan. This is a bigger decision, but it can be the right move if you are underwater on the loan by a large amount.
If you are refinancing to get cash out — to borrow more than you currently owe — that is not refinancing; that is a cash-out loan. Most auto lenders do not offer this, and it is generally not a smart financial move because you are borrowing against a depreciating asset.
Red flags and what to avoid
Avoid refinancing with a lender that charges a prepayment penalty on your current loan. Some older loans include a clause that penalizes you for paying off early. Check your current loan documents or call your lender to ask. If a penalty exists, factor it into your break-even calculation.
Do not refinance multiple times in a short period. Each refinance involves a hard credit inquiry, which temporarily lowers your score. Multiple inquiries in a few months can signal to lenders that you are desperate for credit, which can raise rates on future borrowing.
Be wary of lenders who pressure you to extend the loan term significantly or who advertise "no credit check" refinancing. These are often signs of predatory lending. A legitimate refinance should lower your rate or restructure your payment in a way that makes sense for your situation, not trap you in a longer, more expensive loan.
Frequently Asked Questions
Will refinancing hurt my credit score?
Refinancing will cause a small, temporary drop in your credit score because the new lender runs a hard inquiry. This typically lowers your score by 5 to 10 points and recovers within a few months. The benefit of a lower interest rate usually outweighs this temporary dip if you keep the car long enough to recoup the refinancing fees.
Can I refinance if I still owe more than the car is worth?
Yes, but your options are more limited. If you are upside down on the loan, some banks and credit unions will still refinance, but online lenders often will not. You may also face a higher interest rate. Ask lenders directly whether they refinance negative-equity loans before you explore.
How long does refinancing take?
From approval to first payment with the new lender typically takes one to two weeks. The exact timeline depends on how quickly you return signed documents and how fast the new lender processes the payoff of your old loan. During this time, continue making payments to your current lender on schedule.
What if my current lender charges a prepayment penalty?
Check your loan documents or call your lender to find out. If a penalty exists, add it to your refinancing costs when calculating whether refinancing saves you money. Some lenders will waive the penalty if you refinance with them, so it is worth asking.
Should I refinance to a shorter loan term or a longer one?
A shorter term means higher monthly payments but less total interest paid. A longer term means lower monthly payments but more total interest. Choose based on what you can actually afford and what makes sense for your timeline. If you can afford the payment, a shorter term is almost always better financially.