What happens when you refinance an auto loan

Refinancing an auto loan means taking out a new loan to pay off your existing car loan. The new lender pays off the old loan in full, and you then make payments to the new lender instead. The main reason people refinance is to get a lower interest rate, which reduces your monthly payment or the total amount you pay over the life of the loan.

When you refinance, you keep the same car and the same loan term length (or choose a new one). The new lender will place a lien on your vehicle just as your original lender did. The process typically takes one to two weeks from process to funding, though some lenders can move faster.

Refinancing is not the same as a loan modification. A modification changes the terms of your existing loan with your current lender. Refinancing replaces the loan entirely with a new one from a different lender.

Key Takeaways

  • Your credit score, the age of your car, how much you still owe, and current market rates all affect the interest rate a lender will offer you.
  • Refinancing makes the most sense when your credit score has improved since you took out the original loan, or when market rates have dropped.
  • You can refinance through banks, credit unions, online lenders, and sometimes your current lender, and rates vary significantly between them.
  • The break-even point—where your savings exceed the cost of refinancing—usually takes three to six months, so refinancing late in your loan term may not save you money.

What determines the interest rate you are offered

Your credit score is the single largest factor. Lenders use your score to decide how risky you are as a borrower. A score of 750 or higher typically qualifies for the best rates. A score below 620 will be harder to refinance at all, and if approved, you may not see much savings. If your score has risen since you took out the original loan, refinancing becomes worth considering.

How old your car is matters because older vehicles are worth less and are more likely to need expensive repairs. Most lenders will not refinance cars older than 10 years, and some stop at 8 years. A few lenders specialize in older vehicles but charge higher rates to offset the risk.

How much you owe versus what the car is worth (called your loan-to-value ratio) affects your rate. If you owe $15,000 on a car worth $18,000, you are in a safer position than owing $15,000 on a car worth $12,000. The further underwater you are, the higher your rate will be, or the more likely you will be denied.

Current market interest rates set the floor for what any lender will offer. When the Federal Reserve raises its benchmark rate, auto loan rates rise across the industry. When rates fall, refinancing becomes more attractive. You can check current average rates through sites that publish weekly rate surveys, though your actual rate depends on your individual situation.

Where to get a refinance quote

Banks, credit unions, and online lenders all offer auto refinancing. Credit unions often have lower rates than banks if you are a member, and membership sometimes requires only a small deposit. Online lenders can move quickly and may work with lower credit scores, though their rates are usually higher to compensate.

You can also ask your current lender whether they offer refinancing. Some do, and you may skip the lien transfer process, which saves time. However, your current lender has less incentive to offer you a better rate than you already have, so always compare with at least two other sources.

When you request a quote, the lender will do a hard credit inquiry, which temporarily lowers your score by a few points. Multiple inquiries within 14 days usually count as a single inquiry for scoring purposes, so you can shop around without major damage. Ask each lender for a Loan Estimate, which shows the interest rate, monthly payment, and total cost over the loan term.

When refinancing saves you money

Refinancing saves money when the interest rate on the new loan is lower than your current rate, and the savings exceed the cost of refinancing. Refinancing costs typically include an process fee (usually $0 to $200), a title transfer fee (varies by state, usually $50 to $150), and sometimes a prepayment penalty on your old loan (check your loan documents).

To find your break-even point, divide the total cost of refinancing by your monthly savings. If refinancing costs $300 and your new payment is $50 less per month, your break-even point is six months. If you plan to keep the car for at least that long, refinancing makes sense. If you are planning to sell or trade in the car within six months, you will lose money.

Refinancing also makes sense if you want to shorten your loan term. If you currently have 60 months left and refinance into a 36-month loan, you will pay off the car faster and pay less interest overall, even if the rate is similar. Your monthly payment will be higher, but the total cost is lower.

How the refinancing process works step by step

First, gather your current loan documents and your car's vehicle identification number (VIN). You will need these to get a quote. Request quotes from at least two lenders and compare the interest rate, monthly payment, and total loan cost on each Loan Estimate.

Once you choose a lender, you will complete a full process. The lender will order a vehicle inspection report (usually done remotely or at a local shop) to confirm the car's condition and value. This typically takes two to five business days.

When the lender approves your process, they will contact your current lender to request a payoff amount—the exact balance you owe on the old loan. The new lender then sends the payoff amount directly to your old lender, paying off the loan in full. Your old lender releases the lien on the title.

The new lender places their own lien on the title and mails you new loan documents and payment instructions. You will receive a new payment due date, usually 30 to 45 days after funding. During this time, your old lender may still send you a final statement showing a zero balance.

Reasons refinancing might not work for you

If your credit score has not improved since you took out the original loan, or if market rates have risen, refinancing will not lower your rate. In this case, you will be offered a rate similar to or higher than what you currently have, and refinancing costs money you will not recover.

If you are underwater on your loan—you owe more than the car is worth—many lenders will decline to refinance. Some will refinance if you have a co-signer or if you agree to a longer loan term, but this increases your total cost. If your car is very old or has high mileage, lenders may decline regardless of your credit score.

If you are early in your loan term, refinancing may not save enough to justify the cost. A loan that started 12 months ago still has most of its interest payments ahead, so refinancing into a lower rate saves more money than refinancing a loan that started five years ago.

What happens to your old loan and title

Your old lender receives the payoff amount from your new lender and closes your account. They release the lien on your car's title, meaning they no longer have a legal claim to the vehicle. This release is recorded with your state's Department of Motor Vehicles.

You do not need to do anything with the old lender once the loan is paid off. However, keep the final statement showing a zero balance in case questions arise later. Some lenders mail a release of lien document separately; keep this as well.

Your new lender's lien appears on your title, and you will receive updated title documents in the mail. The process varies slightly by state, but you do not need to visit the DMV yourself—the lenders handle the paperwork.

Frequently Asked Questions

Will refinancing hurt my credit score?

Refinancing causes a temporary dip in your score because of the hard credit inquiry and because you are opening a new account. The dip is usually 5 to 10 points and recovers within a few months. The long-term benefit of a lower interest rate and lower monthly payment typically outweighs this temporary impact.

Can I refinance if I am behind on payments?

Most lenders will not refinance if you are currently behind. You will need to bring your account current first. Once you have made on-time payments for at least a few months, your chances of approval improve. Some lenders specialize in borrowers with recent late payments, but they charge higher rates.

What if my car has a loan from a buy-here-pay-here dealer?

Buy-here-pay-here loans are harder to refinance because these dealers often use GPS trackers and starter interrupt devices. Some traditional lenders will not refinance these loans at all. Credit unions and online lenders that work with non-prime borrowers are your best option, though rates will be higher.

How long does refinancing take from start to finish?

The process typically takes 7 to 14 days from process to funding. The vehicle inspection and lender approval usually take 3 to 5 days. Contacting your old lender for a payoff and processing the transfer takes another 2 to 5 days. Some online lenders can move faster, while some banks take longer.

Can I refinance if I still owe more than the car is worth?

It depends on how far underwater you are and which lender you approach. If you owe $2,000 more than the car is worth, most lenders will decline. Some credit unions and online lenders will refinance if you agree to a longer loan term or bring a co-signer, but this increases your total interest cost.