Refinancing means replacing your current car loan with a new one, usually at a lower interest rate

When you refinance a car, you take out a new loan to pay off the old one. The new lender pays your current lender in full, and you start making payments to the new lender instead. The main reason people refinance is to lower their interest rate, which reduces the total amount you pay over the life of the loan. You might also refinance to change the length of your loan — for example, stretching payments over more years to lower your monthly payment, or shortening the term to pay off the car faster.

Refinancing is not the same as a loan modification. When you modify a loan, your current lender changes the terms of your existing agreement. When you refinance, you get an entirely new loan from a different lender (or sometimes the same lender, but it is still a new agreement). The process typically takes one to two weeks from process to funding.

Key Takeaways

  • Refinancing makes the most sense if interest rates have dropped since you took out your original loan, or if your credit score has improved enough to may have access to for a better rate.
  • You will need your current loan payoff amount, the vehicle's current value, proof of income, and your Social Security number to start the refinancing process.
  • Refinancing costs money upfront — typically $100 to $300 in fees — so you need to save enough in interest to cover those costs before it is worth doing.
  • The longer you have left on your current loan, the more interest you can potentially save by refinancing, but refinancing a nearly paid-off car usually does not make financial sense.

When refinancing actually saves you money

Refinancing saves money only if your new interest rate is meaningfully lower than your current rate. A drop of even 1 or 2 percentage points can add up over time, but you have to subtract the costs of refinancing — process fees, title transfer fees, and sometimes a prepayment penalty from your original lender. Most lenders charge between $100 and $300 in total fees, though this varies by lender and state.

The math works like this: if refinancing saves you $50 per month in interest, but costs $200 in fees, you break even after four months. After that, every month you save money. If you only have six months left on your loan, refinancing probably is not worth it. If you have three years left, refinancing becomes more attractive.

Your credit score is the biggest factor in what rate you will be offered. If your score has risen since you took out your original loan — because you have paid bills on time, paid down other debts, or corrected errors on your credit report — you may now may have access to for a lower rate. You can check your credit score for free through AnnualCreditReport.com, which is the only site authorized by the federal government to provide free reports.

How to find out what rate you might get

Before you commit to refinancing, you need to know what interest rate lenders will actually offer you. You can get rate quotes from banks, credit unions, and online lenders without affecting your credit score, as long as you do all your shopping within 14 days. Each inquiry within that window counts as a single hard inquiry, which is how credit bureaus track it.

To get a quote, you will need basic information: your Social Security number, current annual income, the vehicle's year and mileage, and your current loan payoff amount (call your current lender and ask for this). Most lenders can give you a preliminary rate quote online or over the phone within minutes. This quote is not a may provide — your final rate depends on a full process and verification of your information — but it gives you a realistic sense of what you might pay.

Credit unions often offer lower rates than banks, especially if you are a member. If you are not already a member of a credit union, you may be able to join one through your employer, your school, or a community organization. The Credit Union Locator tool on the CO-OP network website helps you find credit unions you might be able to join.

Documents and information you will need

The refinancing process requires proof that you own the car and that you can afford the new loan. Different lenders ask for slightly different documents, but here is what most will request:

  • Your current loan documents or a payoff statement from your existing lender
  • Proof of income (recent pay stubs, tax returns, or bank statements showing regular deposits)
  • Proof of insurance — most lenders require you to carry comprehensive and collision coverage
  • The vehicle's title or registration
  • A government-issued ID
  • Proof of residency (a utility bill or lease agreement)

Some lenders will also ask for the vehicle's current value. You can find this on Kelley Blue Book or NADA Guides by entering the car's year, make, model, mileage, and condition. Lenders use this value to decide how much they will lend you — they typically will not lend more than the car is worth.

What happens if you still owe more than the car is worth

If your car has depreciated faster than you have paid down the loan, you may be "underwater" — meaning you owe more than the car is worth. This makes refinancing harder but not impossible. Some lenders will refinance an underwater car, but they may charge a higher interest rate to offset the risk. Others will not refinance at all until you pay down the loan enough to match the car's value.

If you are underwater and want to refinance, be honest with lenders about it during the process. Some lenders specialize in these situations. You can also ask your current lender about a loan modification instead, which might lower your rate without requiring a full refinancing process.

Comparing refinancing to other options

Refinancing is not always the best move. If your current interest rate is already very low — below 4 percent — the savings from refinancing may not justify the fees and hassle. If you are planning to sell or trade in the car within the next year or two, refinancing probably will not save you enough money to be worth it.

If you are struggling to make your monthly payment, refinancing to extend the loan term will lower your payment but means you will pay more interest overall and stay in debt longer. In that situation, you might explore whether your current lender offers a loan modification, which can sometimes lower your payment without requiring a new process.

If you need cash urgently, refinancing is not a cash-out option — you cannot borrow more than your payoff amount. A personal loan or home equity line of credit would be a different tool for that purpose.

The refinancing timeline and what to expect

Once you submit a full process, the lender will verify your information and order a vehicle inspection or appraisal. This typically takes three to seven business days. During this time, your credit will be pulled, which causes a small temporary dip in your credit score — usually five to ten points. This recovers within a few months.

After approval, the new lender sends funds to your current lender to pay off the loan in full. You will receive new loan documents and a new payment schedule. Your first payment to the new lender is usually due 30 to 45 days after funding. During the gap between when your old loan is paid off and your first new payment is due, you still own the car and should keep making no payments — the old lender has been paid in full.

One thing to watch: some lenders charge a prepayment penalty if you pay off your loan early. Check your original loan documents or call your current lender to ask. If there is a penalty, factor that into your refinancing calculation — it reduces the money you save.

Frequently Asked Questions

Will refinancing hurt my credit score?

Refinancing causes a small temporary dip in your credit score — typically five to ten points — because the new lender pulls your credit report. This is a hard inquiry, which is normal and expected. Your score recovers within a few months as you make on-time payments to the new lender. The long-term benefit of a lower interest rate usually outweighs this temporary dip.

Can I refinance a car I still owe money on?

Yes. In fact, most people refinance while they still owe money. The new lender pays off your existing loan in full, and you start fresh with the new lender. You cannot refinance a car you own outright unless you take out a new loan against it, which is a different product called a cash-out refinance.

What if my current lender says I have a prepayment penalty?

A prepayment penalty is a fee your current lender charges if you pay off the loan early. This fee reduces the money you save by refinancing. Check your original loan documents or call your lender to find out the penalty amount. If it is high, refinancing may not make financial sense unless you save significantly more in interest.

How soon after buying a car can I refinance?

Most lenders want you to have owned the car for at least six months before refinancing, though some will do it sooner. The vehicle also needs to have a clear title in your name. If you just bought the car and the title is still being processed, wait until it arrives before explore to refinance.

Does refinancing reset the loan term?

Yes. When you refinance, you choose a new loan term — typically 36, 48, 60, or 72 months. You can choose a shorter term than your original loan (paying it off faster) or a longer term (lowering your monthly payment). Choosing a longer term saves money each month but costs more in total interest over the life of the loan.