What happens when you refinance a car loan

Refinancing a car means taking out a new loan to pay off your existing car loan. The new lender pays off what you owe on the old loan, and you start making 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.

The process typically takes one to two weeks from process to funding. Your new lender will order a vehicle inspection and title search, then send the payoff amount directly to your current lender. You keep driving your car the entire time — there is no gap in coverage or ownership.

Not everyone benefits from refinancing. If you owe more than the car is worth, if your credit has declined since you got the original loan, or if you are near the end of your loan term, refinancing may not save you money or may not be possible at all.

Key Takeaways

  • Your interest rate depends on your credit score, the age and mileage of your vehicle, how much you still owe, and current market rates — all of which vary by lender.
  • You will need your current loan documents, proof of insurance, and the vehicle's current mileage to start the process.
  • Refinancing makes the most sense if your credit score has improved since you took out the original loan, or if interest rates have dropped significantly.
  • The new lender handles most of the paperwork and communicates directly with your current lender to pay off the old loan.

What determines your refinance rate

Credit score is the single largest factor. Lenders use your score to decide how risky you are as a borrower. A score above 700 typically qualifies for better rates than a score below 650. If your score has improved since you took out the original loan, refinancing can save you money. If it has dropped, you may not get a better rate at all.

Vehicle age and mileage matter because older cars with high mileage are worth less and are more likely to need expensive repairs. Most lenders will not refinance cars older than 10 years or with more than 150,000 miles, though this varies by lender. A five-year-old car with 60,000 miles will get a better rate than a nine-year-old car with 120,000 miles.

How much you owe versus what the car is worth affects the risk calculation. If you owe $15,000 on a car worth $18,000, the lender has a cushion. If you owe $15,000 on a car worth $12,000, the lender is underwater if the car is repossessed. Lenders charge higher rates or decline to refinance when you are underwater.

Current market interest rates set the floor. If rates have risen since you took out your original loan, refinancing may not help even with a better credit score. If rates have fallen, you have a real opportunity to save.

When refinancing saves you money

The math is straightforward: refinancing saves money when the new rate is lower than the old rate and you keep the car long enough to recoup any fees. A typical refinance costs $200 to $500 in fees, though some lenders waive them.

If you have 24 months left on a loan at 8% interest and you refinance to 5%, you will save money even with fees. If you have 6 months left, the savings may not cover the fees. Use an online calculator with your actual loan balance, remaining term, and the new rate you have been quoted to see the exact number.

Refinancing also makes sense if you want to shorten the loan term. You might refinance a 60-month loan into a 36-month loan at a lower rate, paying off the car faster and paying less interest overall. This raises your monthly payment but saves thousands over time.

How to start the refinancing process

First, gather your current loan documents. You need the loan number, the current balance, and the interest rate. Call your current lender or log into your account online to find this information. You will also need proof of insurance and the vehicle's current mileage.

Next, check your credit score. You can get a free score from your bank, credit card company, or a free service like Credit Karma or AnnualCreditReport.com. Knowing your score before you shop helps you understand what rates you might may have access to for.

Then contact lenders to get rate quotes. Banks, credit unions, and online lenders all offer car refinancing. Credit unions often have lower rates than banks, especially if you are a member. Online lenders are faster but may have higher rates. Get quotes from at least three lenders before deciding.

Once you choose a lender, they will ask you to complete an process. This is when they pull your credit report and order the vehicle inspection. You do not need to do anything with your current lender — the new lender handles the payoff and title transfer.

Documents and information you will need

Have your current loan documents ready before you contact a lender. You need the loan account number, current balance, interest rate, and the name of your current lender. If you do not have the paperwork, call your lender's customer service line and ask them to read this information to you over the phone.

You will also need proof of insurance. Most lenders require you to show that the car is insured before they will fund the new loan. A screenshot of your insurance company's website or a copy of your insurance card works.

The lender will ask for the vehicle's current mileage, the year and make, and the VIN (vehicle identification number). The VIN is on your registration, insurance card, or the dashboard on the driver's side. The lender uses this to order a vehicle history report and confirm the car's value.

Finally, you will need to provide your Social Security number, income information, and employment details. The lender uses this to verify you can afford the new payment.

What happens after you are approved

Once approved, the lender sends you loan documents to sign electronically or by mail. Read these carefully — they show the new interest rate, the new monthly payment, and the loan term. This is your final note to back out if the numbers do not match what you were quoted.

After you sign, the lender orders a vehicle inspection. This is usually done by a third party and takes a few days. The inspector checks that the car matches the description in the title and that it is in reasonable condition. You do not need to do anything — the inspector will contact you to schedule a time.

Once the inspection is complete, the lender funds the loan and sends the payoff amount to your current lender. Your current lender applies this payment to your account and releases the title. The new lender records the new lien on the title and mails it to you. This entire process takes one to two weeks.

Your first payment to the new lender is usually due 30 to 45 days after funding. You will receive payment instructions by mail or email. Set up automatic payments if possible to avoid missing a payment during the transition.

Reasons refinancing might not work

If you are underwater — meaning you owe more than the car is worth — most lenders will decline to refinance. Some lenders will refinance if you have a co-signer or if you agree to a longer loan term, but this defeats the purpose of saving money.

If your credit score has dropped since you took out the original loan, you may not may have access to for a better rate. In this case, refinancing will not save you money and may cost you more.

If you are near the end of your loan term, the remaining interest is small. Refinancing fees may exceed the interest you would save. If you have 12 months or fewer left on your loan, run the numbers carefully before proceeding.

If interest rates have risen since you took out your original loan and your credit score has not improved, there is no benefit to refinancing. You would straightforward be locking in a higher rate.

Frequently Asked Questions

Will refinancing hurt my credit score?

Yes, but only temporarily. The lender will pull your credit report, which causes a small dip of a few points. This inquiry stays on your report for about 12 months but stops affecting your score after a few months. The new loan will also lower your average age of accounts, which may lower your score slightly. However, if refinancing lowers your monthly payment and you pay on time, your score will recover and improve over time.

Can I refinance if I am behind on payments?

Most lenders will not refinance if you are currently behind. You need to be current on your loan before explore. If you are close to being behind, contact your current lender about a payment plan before you pursue refinancing.

What if my car is worth less than what I owe?

This is called being underwater. Some lenders will refinance if you have a co-signer or if you agree to a longer loan term, but this usually means paying more interest overall, not less. Your best option is to wait until you have paid down the loan enough to be above water, or to explore whether your current lender will modify your existing loan.

How long does the refinancing process take?

From process to funding typically takes one to two weeks. The lender needs time to pull your credit, order a vehicle inspection, and process the paperwork. Some online lenders are faster, but most traditional banks and credit unions take the full two weeks.

Can I refinance with the same lender I have now?

Yes, and sometimes your current lender will offer you a better rate without requiring a full process. Call your lender and ask if they offer rate reductions for existing customers. This can be faster than going through a new lender, though you should still shop around to make sure you are getting the best deal.