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If you bought a car when interest rates were high or your credit score was less than stellar, you might be paying more than necessary each month. Refinancing your auto loan could free up cash and save you hundreds—even thousands—over the life of the loan. But it’s not for everyone. Here’s how to decide if it’s right for you and how to get the best deal.
What Does It Mean to Refinance an Auto Loan?
When you refinance, you take out a new loan to pay off your existing car loan. The new loan ideally comes with a lower interest rate, a different term, or both. You’ll work with a new lender (or sometimes your current one) to set up new monthly payments. The process is similar to getting your original loan, but it can be faster since you already own the vehicle.
For example, say you originally financed $25,000 at 8% APR for 60 months. After two years of payments, you owe $15,500. If you refinance that remaining balance at 5% APR for 36 months, your monthly payment might drop from $507 to $465, and you’ll pay less interest overall.
When Does Refinancing Make Sense?
1. Your Credit Score Has Improved
If your credit score has jumped by 50 points or more since you bought the car, you’ll likely qualify for a lower rate. Even a 2% drop in APR can mean big savings. Check your credit report for free at AnnualCreditReport.com before you apply.
2. Interest Rates Have Dropped Overall
When the Federal Reserve cuts rates, auto loan rates often follow. If current rates are significantly lower than what you’re paying, refinancing could lock in that savings. Keep an eye on average rates from banks and credit unions.
3. You Want to Lower Your Monthly Payment
If cash flow is tight, extending your loan term (say from 48 to 72 months) can reduce your payment. But be careful—a longer term usually means paying more interest over time. Only do this if you truly need the breathing room and plan to pay extra when you can.
4. You’re Struggling With a High-Interest Dealer Loan
Dealerships often mark up rates to earn a commission. If you suspect you got a raw deal, compare your current rate to what credit unions or online lenders offer. You might find a rate that’s 3–5% lower.
When NOT to Refinance
- Your car is old or has high mileage. Most lenders won’t refinance vehicles over 10 years old or with more than 100,000 miles. And if they do, the rate may not be worth it.
- You’re upside down on the loan. If you owe more than the car is worth, refinancing is difficult unless you bring cash to cover the gap.
- You plan to sell the car soon. The savings from a lower rate might not outweigh the fees and hassle of refinancing.
- You have only a few payments left. The potential savings are too small to justify the paperwork and possible prepayment penalties.
How to Refinance Your Auto Loan in 5 Steps
Step 1: Check Your Credit Score and Report
Lenders will pull your credit, so know your score first. Aim for at least 650–700 for decent rates. If your score is below 600, you might want to wait and work on improving it. Dispute any errors on your report before applying.
Step 2: Determine Your Car’s Value
Use Kelley Blue Book or NADA Guides to find the current market value. Lenders typically refinance only up to 100–120% of the car’s value. If you owe more than that, you may need to pay down the loan first.
Step 3: Shop Around for Lenders
Don’t settle for the first offer. Check with:
- Your current lender
- Local credit unions (often have the lowest rates)
- Online lenders like LightStream, SoFi, or Bank of America
Get quotes from at least three lenders within a two-week window to minimize the impact on your credit score.
Step 4: Compare Loan Offers
Look beyond the monthly payment. Focus on the APR and total interest over the loan term. A longer term might lower your payment but cost you thousands more in interest. Use an online auto loan calculator to compare scenarios.
For instance, a $20,000 loan at 6% for 48 months costs $470 monthly and $2,560 in interest. The same loan at 4% saves $1,260 in interest. At 6% for 72 months, the payment drops to $331, but interest jumps to $3,840.
Step 5: Apply and Complete the Paperwork
Once you pick a lender, submit a formal application. You’ll need your driver’s license, proof of insurance, the car’s title, and payoff information from your current lender. The new lender will pay off the old loan, and you’ll start making payments to them. The whole process can take a few days to two weeks.
Hidden Costs to Watch For
Some lenders charge origination fees ($25–$100), title transfer fees, or prepayment penalties. Ask upfront. If the costs eat up your savings, refinancing might not be worth it. Also, confirm that your new loan doesn’t require you to buy gap insurance or other add-ons you don’t need.
How to Improve Your Chances of Approval
If your credit is fair, consider adding a co-signer with good credit. A larger down payment (even $500–$1,000) can reduce the loan-to-value ratio and help you qualify. Some lenders also look at your income and debt-to-income ratio, so paying down other debts first can help.
Refinancing With Bad Credit: Is It Possible?
Yes, but your options are limited. Subprime lenders specialize in borrowers with credit scores below 600, but their rates are still high. You might only save a percent or two. If you can, wait six months to a year, build your credit, then try again.
Should You Refinance Through the Same Lender?
Sometimes your current lender will offer a “rate modification” or a streamlined refinance with no fees. It’s worth asking, but don’t assume they’re giving you the best rate. Always compare with other lenders.
What About Refinancing a Leased Car?
Generally, you cannot refinance a lease. However, if you want to buy the car at the end of the lease, you can get a loan to purchase it (that’s not technically refinancing). If you’re still in the lease, you’re stuck with the terms until it ends.
The Bottom Line: Run the Numbers
Before you commit, calculate exactly how much you’ll save. Use a simple formula: total interest on your current loan minus total interest on the new loan, plus any fees. If the savings are at least $200–$300 over the remaining life of the loan, it’s likely worth it.
Refinancing your auto loan isn’t a one-size-fits-all solution, but for many drivers, it’s a straightforward way to put more money back in their pocket each month. Take the time to shop around, read the fine print, and make sure the math works in your favor.
