Refinancing replaces your current car loan with a new one, usually at a different interest rate or term length
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 your monthly payment or the total interest you pay over the life of the loan. You might also refinance to change how long you have to pay back the loan, or to switch from a variable rate to a fixed rate.
Refinancing is not the same as a loan modification. When you modify a loan, your current lender adjusts the terms of your existing agreement. When you refinance, you are borrowing from a different lender (or sometimes the same lender, but under a brand new loan contract). The process typically takes one to two weeks from process to funding, though some lenders can move faster.
Key Takeaways
- Refinancing makes the most sense if your credit score has improved since you took out the original loan, because a higher score usually qualifies you for a lower interest rate.
- You will save money only if the interest rate on the new loan is lower than your current rate by enough to cover the refinancing costs, which typically run $100 to $300.
- The longer you plan to keep the car, the more time you have to recoup the refinancing costs through monthly savings.
- Refinancing extends your loan term if you are not careful — always compare the total interest paid, not just the monthly payment.
- Your current lender may charge a prepayment penalty if you pay off the loan early, so check your loan documents before you start the refinancing process.
When your credit score has improved since you got the original loan
The single biggest reason to refinance is a higher credit score. If your score was lower when you took out the original loan — perhaps because you had recent late payments, high credit card balances, or limited credit history — and your score has since improved, you will likely may have access to for a lower interest rate. Even a one or two percentage point drop in your rate can save you hundreds of dollars over the remaining life of the loan.
Check your credit score before you start shopping for refinancing. You can get a free credit report once per year from AnnualCreditReport.com, which is the official government site. Your current bank or credit card company may also show your score for free in your online account. A score of 700 or higher generally qualifies you for better rates, though the exact threshold depends on the lender.
When you explore for refinancing, lenders will pull your credit report, which temporarily lowers your score by a few points. Multiple applications within a short window (usually 14 to 45 days, depending on the type of loan) typically count as a single inquiry, so shop around within a few days if you are comparing offers from multiple lenders.
The math: comparing your current rate to the new rate
Refinancing costs money upfront. Most lenders charge between $100 and $300 in fees, though some lenders advertise no-fee refinancing (they typically build the cost into a slightly higher interest rate instead). You need to calculate whether the monthly savings from a lower rate will cover these costs before you break even.
Here is the basic calculation: subtract the new interest rate from your current rate, multiply by your remaining loan balance, and divide by 12 to get your approximate monthly savings. Then divide the refinancing costs by your monthly savings to find your break-even point in months. For example, if you are saving $50 per month and the refinancing costs $300, you break even after six months. If you plan to keep the car for at least that long, refinancing likely makes sense.
Be cautious about refinancing offers that lower your monthly payment by extending your loan term. If your original loan had 24 months remaining and the new loan stretches that to 48 months, your monthly payment will drop — but you will pay far more in total interest. Always ask the lender for the total interest you will pay over the full term of the new loan, and compare it to the total interest remaining on your current loan.
How long you plan to keep the car matters
The longer you keep the car, the more time you have to benefit from a lower interest rate. If you are planning to trade in or sell the car within six months, refinancing probably is not worth the upfront costs and effort. If you plan to keep it for several more years, the savings add up.
Think about your actual situation, not just your best intentions. If you typically keep cars for three to five years, use that timeframe. If you are uncertain, assume a shorter window — it is better to be conservative and miss out on some savings than to refinance and then sell the car before you break even.
Prepayment penalties and loan terms to check first
Before you explore to refinance, read your current loan documents or call your lender and ask: "Is there a prepayment penalty if I pay off this loan early?" Some lenders charge a fee if you pay off the loan before a certain date or before a certain amount of time has passed. This penalty can range from a flat fee to a percentage of the remaining balance. If your current lender charges a prepayment penalty, that cost needs to be factored into your break-even calculation.
Also check whether your current loan has a variable interest rate or a fixed rate. Variable rates can change over time, which means your payment could increase. If your rate is variable and interest rates are rising, refinancing into a fixed-rate loan might make sense even if the new fixed rate is slightly higher than your current variable rate — because you will have certainty about your payment going forward.
When refinancing does not make financial sense
Do not refinance if your credit score has not improved. If your score is the same or lower than when you took out the original loan, you will not may have access to for a better rate. explore anyway will trigger a hard inquiry on your credit report and waste your time.
Do not refinance if you are underwater on the loan — meaning you owe more than the car is worth. Most lenders will not refinance a car loan in this situation, because they have no collateral to recover if you default. You can sometimes find a lender willing to refinance an underwater loan, but the interest rate will be higher than your current rate, which defeats the purpose.
Do not refinance if you are behind on your current payments or have recent late payments on your credit report. Lenders see this as a sign of financial distress and will either decline your process or offer you a rate higher than your current one. Focus on getting current on your payments first, then wait six to twelve months before refinancing.
The refinancing process: what to expect
Start by gathering information about your current loan: the remaining balance, the current interest rate, the monthly payment, and the number of months remaining. You can find this on your loan statement or by logging into your lender's website.
Then shop around. Banks, credit unions, and online lenders all offer car refinancing. Credit unions often have lower rates than banks, especially if you are a member. Get quotes from at least two or three lenders. When you request a quote, ask for the interest rate, the monthly payment, the total interest you will pay, and all fees. Most lenders can give you a quote without a hard credit pull, so you can compare offers before committing.
Once you choose a lender, you will complete a formal process, which triggers a hard credit inquiry. The lender will verify your income, employment, and vehicle information. They will also order a vehicle inspection or valuation to confirm the car is worth enough to find the loan. This process typically takes three to seven business days. Once approved, the lender will contact your current lender, arrange payment, and send you new loan documents to sign. You will then make your first payment to the new lender.
Frequently Asked Questions
Can I refinance a car I still owe money on?
Yes. The new lender pays off your current loan in full, and you start making payments to the new lender. This is the most common type of car refinancing. The car serves as collateral for both loans.
Will refinancing hurt my credit score?
The hard inquiry from the refinancing process will lower your score by a few points temporarily. However, refinancing typically does not hurt your score long-term, and the score usually recovers within a few months. Paying on time with the new lender will help rebuild it.
What if I have a very old car — can I still refinance?
Most lenders have age and mileage limits. Many will not refinance cars older than 10 years or with more than 150,000 miles, though some lenders are more flexible. Call lenders directly to ask about their limits before you explore.
Can I refinance with the same bank that gave me the original loan?
Yes. Some people refinance with their current lender to get a better rate without switching banks. You will still go through a formal process process and a new credit inquiry, but you may have an easier time since the lender already knows your payment history.
What happens to my old loan documents after I refinance?
Your old loan is paid off and closed. The new lender will send you new loan documents. Keep the old documents for your records, but you will not need to do anything with them. The title to your car will remain in your name.