What a car refinance is
A car refinance means replacing your current auto loan with a new one from a different lender. The new lender pays off what you still owe on the old loan, and you then make monthly payments to the new lender instead. The terms of the new loan — the interest rate, the monthly payment amount, and how many months you have to repay — can be different from your original loan.
Refinancing does not change what you own or who holds the title to your car. You keep driving the same vehicle. What changes is who you send your payment to each month and what that payment costs you.
Key Takeaways
- Refinancing replaces your current auto loan with a new one, usually from a different lender, but you keep the same car.
- A lower interest rate is the most common reason to refinance, because it reduces your total cost and monthly payment.
- Your credit score, how much you still owe, and how much your car is worth all affect whether a lender will refinance you and what rate they offer.
- Refinancing costs money upfront — typically $0 to $500 in fees — and takes one to two weeks to complete.
- Refinancing makes the most sense if your credit has improved since you took out the original loan, or if interest rates have dropped.
Why people refinance their car loans
The most common reason is to lower your interest rate. If you took out your original loan when your credit score was lower, or if market interest rates have fallen, a new lender may offer you a better rate. Even a 1 or 2 percent drop in interest rate can save you hundreds of dollars over the life of the loan.
A second reason is to lower your monthly payment. This can happen either because the new rate is lower, or because you extend the loan term — spreading the remaining balance over more months. A lower payment gives you more monthly cash flow, though it means you pay interest for longer.
Some people refinance to change the loan term itself. You might refinance from a 72-month loan into a 48-month loan if your financial situation improved and you want to own the car free and clear faster. Or you might do the opposite if you need to reduce your monthly payment.
What lenders look at when you refinance
Lenders check your credit score first. A higher score gets you a lower rate. If your score has risen since your original loan — because you have paid bills on time, reduced credit card balances, or resolved past problems — you become a better candidate for refinancing.
Lenders also compare what you owe on the loan to what your car is worth. If you owe $15,000 and the car is worth $18,000, that is a healthy position. If you owe $18,000 and the car is worth $15,000, you are "underwater" on the loan, and most lenders will not refinance you. Some will, but at a higher rate.
Your payment history on the current loan matters too. If you have missed payments or paid late, lenders see you as riskier and charge a higher rate — or decline to refinance you at all. Lenders also verify that you own the car and that no other liens are against it.
The costs and timeline of refinancing
Refinancing is not free. You typically pay a loan origination fee (usually $0 to $300), a title transfer fee (varies by state, typically $50 to $200), and possibly a credit check fee ($10 to $50). Some lenders advertise "no-fee" refinancing, but that usually means they build the cost into the interest rate instead of charging it upfront.
The process takes one to two weeks from process to funding. You submit an process, the lender orders a vehicle inspection and title search, and once approved, they send money to your old lender to pay off the balance. Your old lender releases the title, and the new lender records their lien. During this time, you keep making payments to your old lender as usual.
When refinancing saves you money
Refinancing saves money when the interest rate you get is lower than your current rate, and the savings outweigh the upfront costs. A rough rule: if you can lower your rate by at least 1 percent and you have at least two years left on the loan, refinancing usually makes financial sense.
For example: you owe $12,000 at 7 percent interest with 48 months left. Your monthly payment is about $290. A new lender offers 5 percent for 48 months, which brings your payment to $277. You save $13 per month. Over 48 months, that is $624 in savings. If refinancing costs $200 in fees, your net savings is $424.
Refinancing makes less sense if you have very little time left on the loan. If you have only six months remaining, the interest you save will not cover the upfront costs. It also makes less sense if you are underwater on the loan, because most lenders will decline or charge you a much higher rate.
How to compare refinance offers
Get quotes from at least three lenders — banks, credit unions, and online lenders all offer auto refinancing. Each quote should show the interest rate, the monthly payment, the loan term, and all fees. The rate you are quoted depends on your credit score and the vehicle, so quotes from different lenders may vary.
Compare the total cost, not just the monthly payment. A longer loan term lowers the payment but increases the total interest you pay. Use an auto loan calculator to see the total amount you will pay under each offer, including all fees.
Check whether the lender allows early payoff without penalty. Some lenders charge a prepayment penalty if you pay off the loan early, which limits your flexibility if your financial situation improves.
What happens to your old loan
When the new lender funds the refinance, they send a check directly to your old lender, paying off the remaining balance in full. Your old lender then closes the account and releases the lien on the title. You will receive a final statement showing a zero balance.
The old loan will remain on your credit report for seven years, but it will show as "paid in full" or "closed." This does not hurt your credit score — in fact, paying off a loan in full is positive for your credit history. Your new loan appears as a new account on your credit report.
Frequently Asked Questions
Can I refinance a car I still owe money on?
Yes, that is the whole point of refinancing. You refinance the amount you still owe, not the original purchase price. The new lender pays off the old loan in full, and you start making payments to the new lender.
What if my car is worth less than what I owe?
Most lenders will not refinance you if you are underwater. Some credit unions and specialized lenders will, but they charge a higher interest rate to cover the risk. Your best option is to wait until you have paid down the loan enough that the car is worth more than you owe.
Does refinancing hurt my credit score?
Refinancing causes a small, temporary dip in your credit score because the new lender runs a hard credit inquiry and you are opening a new loan account. The dip is usually 5 to 10 points and recovers within a few months. The long-term impact is positive if the refinance saves you money and you make on-time payments.
How long do I have to wait after getting a car loan to refinance?
There is no official waiting period. You can refinance when ready after buying a car. However, most lenders prefer to see at least a few months of on-time payments on the original loan, because it shows you are a reliable borrower. Some lenders will refinance after 60 days; others want six months.
What if I am behind on my current car loan?
Refinancing is not an option if you are currently behind on payments. Lenders will see the missed payments and decline your process. You need to bring the loan current first, then wait a few months of on-time payments before explore to refinance.