A car loan can open many possibilities but also eat up your budget. The average car loan payment for new vehicles was $716 during the last quarter of 2022.
One way to make your car payment more affordable is by swapping it out with a new loan, ideally with a lower interest rate—in other words, refinancing. This can help you achieve other goals, such as paying off your car sooner or saving money on interest.
In this guide:
- Can you refinance your auto loan?
- Should you refinance your auto loan?
- What if you decide to refinance your auto loan?
Can you refinance your auto loan?
If you have an auto loan, you may be able to refinance it with a new lender for a different term length or a different interest rate. The process works the same as when you took out your first car loan: You’ll apply for the loan, and the lender will check you and the car.
Since you’re applying for a new loan, you must meet your new lender’s qualification requirements, which may differ from your last lender. If you’re approved, your new lender will pay off your old loan and have the car title transferred. Your previous lender will close out your old loan, and you’ll start paying your new lender.
The reasons borrowers choose to refinance their auto loans include the following:
- To get a shorter term length, which can help you pay it off sooner.
- To get a longer term length, which can help lower your monthly payments.
- To remove someone else from the car loan, such as an ex-spouse or cosigner.
- To get a lower interest rate, which can help you save money and pay it off sooner.
Can you refinance your auto loan if you just got the loan?
If you can find a lender who will approve you, you can refinance your auto loan as soon as you want—even if you just took it out.
However, most auto refinance lenders won’t approve you until they receive the car title, which can take a few months to transfer from the previous owner to your current lender.
Can you refinance your auto loan if you have bad credit?
Getting approved for a refinance auto loan will be more challenging if you have bad credit, but it may be possible. Specific lenders specialize in bad-credit refinance loans, but you’ll often pay higher fees and interest rates. It may not make financial sense to refinance a car loan if you have bad credit.
Can you refinance your auto loan if your car is older?
Most lenders have age and mileage restrictions for auto loan refinances. These vary by lender but are often around 10 years or less, or under 100,000 miles. That can limit your options. In some instances, you may be unable to find a lender to refinance an old car.
Can you refinance your auto loan if you can’t make the monthly payments?
You must at least show you can afford the monthly payments on your new loan to be approved for a new car refinance loan.
You should be up to date on your monthly payments to refinance your auto loan. Being behind on payments may make you ineligible to refinance.
Can you refinance your auto loan if your income is higher than when you took out the loan?
Yes. Income is one of the biggest factors lenders consider when deciding whether to approve you for a loan. If you’re earning more money now, you might stand a better chance at approval if you meet your new lender’s other requirements.
Can you refinance your auto loan if you got the loan from a car dealership?
Yes. As long as you can find a lender who will approve you for a car refinance loan, you can refinance the debt no matter where you got your original loan. It’s wise to check whether your current loan contract outlines any prepayment penalties, which are essential to consider.
Can you refinance your auto loan if you’re making a big purchase soon?
You can refinance your car loan anytime if a lender approves you. But if you’re planning to apply for a significant purchase, such as a mortgage, it’s wise to space these purchases out by at least six months, so you don’t jeopardize your odds of approval for either loan.
Can you refinance your auto loan if you don’t have proof of residence?
You will need an address to get approved for a car loan. However, depending on the lender, your driver’s license may be all you need to show for proof of address.
Can you refinance an upside-down auto loan?
Yes, you can often refinance your car loan even if it’s upside down, meaning you owe more on the loan than your car is worth.
Be careful, though. This can be a risky financial move, especially if you refinance for a longer term.
Should you refinance your auto loan?
Refinancing your car loan is a significant decision, and you could end up in a tough financial spot if you make a mistake. But if it’s the right call, it can help you budget.
Consider the following:
- How much time do you have left on the loan? Refinancing offers the most interest savings if you’re early into or halfway through your repayment.
- What are the markets doing? Interest rates are constantly changing, which can affect whether refinancing makes financial sense.
- Has your credit score changed? If your credit score has increased since you took out your car loan, you may qualify for lower rates—but the opposite is also true.
- Has your income changed? As with your credit score, if you’ve seen a significant bump in income, you may qualify for better terms on a new loan.
- Have your expenses changed? If your budget’s recently changed, refinancing can help wedge your monthly payments into a better fit.
- Can you afford the new payments? Borrowers often refinance because they can’t afford their payments, but ensure you can make the new one too.
- How much will it cost? Although rare, your current loan may have prepayment penalties. Your new loan may come with origination fees or other expenses too.
- Are you comfortable with the total interest costs? Refinancing changes the total interest you’ll pay, which you can calculate with a refinancing calculator.
- Are you comfortable with your new loan term? Refinancing for a longer term means you’ll be in debt for longer, putting you at a higher risk of being upside down on your loan.
What if you decide to refinance your auto loan?
If you decide refinancing your car loan is a wise money move, the next step is to research how to refinance your auto loan to set yourself up for success.
In general, it’s best to shop around and check your rate with several lenders to ensure you get the best deal.