When to Refinance an Auto Loan

Refinancing a car loan involves replacing an existing loan with a new one. The new loan proceeds are used to pay off your old balance, and your new loan could have a different rate, term, or monthly payment amount. 

Borrowers generally refinance for two reasons: to lower their interest rate and save money in the long run or to extend their term and reduce their monthly payments. While a lower monthly payment might be easier to manage, a longer term generally means higher interest costs over the life of your loan.

Sometimes, it doesn’t make sense to refinance at all. Here’s what to know about auto loan refinancing, when it might make sense, how to refinance, and common questions about the process. 

When should you refinance your car loan?

Borrowers often choose to refinance for a lower interest rate, which reduces their interest costs in the long run (use our auto loan refinance calculator to see how much you could save).

Refinancing to extend your term and reduce your monthly payment can help regardless if you pay more in interest over the extended term, especially if you’re facing financial hardship.

Here are several scenarios and whether an auto loan refinance might make sense. Keep reading to learn more about each one.

Consider refinancing if …	Don’t refinance if …
✅ Your credit score has increased	❌ You’re not eligible for a lower rate
✅ Your financial situation has improved	❌ Your car is older
✅ Market rates have dropped	❌ Your current loan has prepayment penalties
✅ You’re willing to extend your repayment term	❌ You’re applying for a mortgage or another large loan soon

Your credit score has increased

The best interest rates are reserved for those with the best credit scores, so if your score has improved since you took out your car loan, you might qualify for a lower rate.

Many banks and credit card companies let you check your credit score for free. If you know you’ve paid down significant debt, settled a collection, or kept current on all your bills, it’s likely improved. But if market rates have increased significantly since you borrowed your existing loan, even a better credit score might not result in a lower rate. 

Other financial factors have improved

Your credit score isn’t the only factor lenders consider when you apply for a loan. If you’re earning more or have paid down significant debt since you took out your initial loan, effectively reducing your debt-to-income ratio, it’s possible you could get a better rate or term. 

Market rates have dropped

Interest rates fluctuate often, and depending on when you got your loan, they could be lower or higher under current market conditions. Federal Reserve policy, inflation, current economic conditions, and more can influence market rates.

You’re willing to extend your repayment term

By extending your repayment term, you pay down your loan balance over a longer timeframe, often reducing your monthly payment. 

If you’re considering going this route, compare the total costs. A lower monthly payment is beneficial, but a longer term could increase interest costs.

When to avoid refinancing your car loan

Auto refinancing isn’t always the right move. It might not work in your favor in several scenarios.

You’re not eligible for a lower interest rate

Perhaps market rates have increased significantly since you took out your initial loan, your credit score has declined, or your debt-to-income ratio is higher. If this is the case, you likely won’t be eligible for a lower interest rate, and refinancing probably doesn’t make sense. 

Your car is older

Remember, a car is a depreciating asset, not an investment. Many lenders have strict age and mileage limits on cars they’ll finance or refinance. If your car is more than 10 years old or has over 100,000 miles on the odometer, you might have difficulty finding a lender. 

Your current loan comes with prepayment fees

Some loans come with prepayment penalties. If this is the case with yours, be careful this cost doesn’t add up to more than you’d save by refinancing. This would negate the purpose of refinancing altogether.

You’re considering applying for a mortgage or other large loan

Refinancing your car loan will require a hard credit pull, which may hurt your credit score. This could mean less favorable terms—and a higher interest rate—when applying for a mortgage or another loan. 

Your overall debt load will be higher if you take out a car loan shortly before you plan to apply for a mortgage. This could impact your ability to qualify for a home loan or get approved for the amount you seek.

Ask the expert

Erin Kinkade

CFP®

Industry standards recommend applying for a mortgage or loan at least six months after refinancing. However, if timely payments have not been made or your debt-to-income ratio is high, it’s recommended that you work on making timely payments or setting up a payment plan and delaying the application for an additional loan or mortgage until your debt-to-income ratio has lowered.

How to refinance your car loan

If you’ve decided to refinance your auto loan, it’s important to research and compare lenders and loans to maximize your savings. Here’s what the refinancing process typically involves.

1) Shop for a lender

Shopping around is important to find the lowest rate and best terms. Also, ensure you meet your lender’s qualification guidelines. Use our guide to the best auto loan refinance lenders to get started and see what rates are available with each lender you’re considering. 

Many lenders also let you prequalify using a soft credit pull, so it doesn’t affect your credit score. Prequalifying can help you understand the rates and terms you could get with a particular lender.

2) Gather your documentation

You’ll need several financial documents to apply for your new loan. These may include:

• Current loan documents (account statements, payment terms, contracts, etc.)
• A copy of your driver’s license
• Recent pay stubs
• Proof of employment
• A copy of your Social Security card

You will also need information about your vehicle, such as its age, make, model, and VIN.

3) Apply 

Next, fill out applications from the lenders you’re considering. This may require the documents noted above and more, as well as basic information about you, your household, your car, and your finances. 

It’s smart to complete all your applications within a 14-day window, as credit scoring models typically allow for a “rate-shopping period,” in which they only count multiple hard inquiries as one.

4) Review your offers and choose your loan

Once the lenders process your applications, you’ll get your loan offers. Be sure to compare each loan’s interest rates, APRs, and other terms—including prepayment penalties if you pay off the loan early.

5) Complete any final paperwork

After you’ve chosen your loan option, you’ll need to complete final paperwork, sign your contract, and finalize your loan. It takes time to pay off your old loan and transfer the balance, so continue making payments on your old loan until you’re sure it’s repaid.

Auto loan refinancing FAQ

Can I refinance my car with the same lender?

Yes, it’s possible to refinance your loan using your current lender if you can qualify. It may offer you incentives to do so. If this is the case, shop around and compare options so you know you’re getting the best deal.

How much does it cost to refinance a car loan?

You generally won’t pay many fees to refinance a car loan, but they can vary by lender. You could incur application fees, prepayment penalties for paying off your first loan, and lienholder fees to re-register your vehicle with the state. Asking about potential costs ahead of time can help you prepare for them.

How soon can I refinance my car loan?

You often need to wait at least two to three months to refinance your car loan—enough time for your title to transfer. Consider waiting to refinance when it makes financial sense for you or when market rates have dropped enough to reduce your long-term costs.

Can I lower my payment without refinancing?

If your lender is willing, it might extend your term and lower your payments without requiring a full refinance. This is called a loan modification.

Can I refinance a car loan with bad credit?

It’s possible to refinance with bad credit, but it might not work in your favor. A lower credit score generally means higher interest rates and higher costs in the long run.

Will refinancing hurt my credit?

Refinancing your car loan requires a hard credit inquiry, which will decrease your score by a few points. But credit scores are always in flux. If you make on-time payments and keep your balances in check, it should recover shortly.

You can learn more about this process with our guide on how auto refinancing affects your credit.