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Auto Loans

When to Refinance an Auto Loan

Updated Apr 06, 2023   |   8-min read

When you refinance your car loan, you are essentially replacing your existing loan with a new one. The new loan is used to pay off your old balance, and you’ll get a different rate, term, and monthly payment as part of your new one.

Refinancing can serve one of two purposes: First, it can help you lower your interest rate and save you money in the long run. It can also extend your loan term and reduce your monthly payment. A quick warning here: While a lower monthly payment might make paying your bill easier, a longer term will mean a longer repayment period and usually more interest over the life of the loan.

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When Should You Refinance Your Car Loan?

The main reason to refinance a car loan is for a lower interest rate, which would save you money in the long haul (use our auto loan refinance calculator to see just how much you could save). Refinancing for a lower monthly payment can be helpful, too, especially if you’re dealing with reduced wages or are facing financial hardship.

Here are some scenarios when you might want to consider an auto refinance:

Your credit score has increased

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

You can check your credit score to verify the rates for which you’ll qualify. Most banks and credit card companies now offer this service. If you know you’ve paid down a lot of your debts, settled a collection, or just kept current on all your bills, it’s likely improved since your initial application.

Other financial factors have improved

If your financial situation has improved in other ways, that could also mean qualifying for better interest rates. Lowering your debt-to-income ratio—which means your credit card, loan, and other balances now take up a smaller portion of your income each month—is one such example. A higher income or salary can help, too.

Market rates have dropped

Interest rates fluctuate daily, and depending on when you got your loan, they could be lower or higher under current market conditions. Federal Reserve policy can influence market rates, as can things like inflation, investment activity, and more. Here’s a peek at what current auto rates look like on auto loans.

You’re willing to extend your repayment term

By extending your repayment term, you spread your loan balance across more months, thereby reducing your monthly payment. Make sure you compare the total costs of doing this, considering how much more you will pay in interest over time, before choosing this option.

When Should You Avoid Refinancing Your Car Loan?

Auto refinancing isn’t always the right move. There are some scenarios when it might not work in your favor to refinance your auto loan.

These include times when:

  • You’re not eligible for a lower interest rate. This may be because your credit score is low or has decreased, your debt-to-income ratio is high or has increased, or you have collections against you or have recent late payments.
  • You’re underwater on your current loan. If you owe more than your car is worth, you’ll be hard-pressed to find a lender willing to refinance your loan. This would be a significant risk for them, since selling the car would not be enough to cover their losses if you default on your loan.
  • Your car is older. Most lenders have strict age limits on cars they’ll finance or refinance. If your car is more than 10 years old, you’ll probably have difficulty finding a lender.
  • Your current loan comes with prepayment fees. If your loan has prepayment penalties, you need to be careful they don’t add up to more than what you’d save by refinancing. This would negate the purpose of refinancing all together.
  • You’re considering applying for a mortgage or other large loan in the future. Refinancing your car loan will require a hard credit pull, which could lower your credit score. This would mean less favorable terms—and a higher interest rate—when applying for that potentially much larger mortgage or another loan.

How to Refinance Your Car Loan

If you’ve decided to refinance your auto loan, it’s important to be thorough in how you go about it—especially if you want to maximize your potential savings.

Here’s what the refinancing process looks like:

1) Shop around for a lender.

Shopping around is important if you want to find the lowest rate and best terms. You also need to make sure 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 consider. Make sure you look for lenders that prequalify using a soft credit pull, so it doesn’t impact your score.

2) Gather your documentation.

You’ll need a number of financial documents in order to apply for your new loan. This includes items like:

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

You will also need to have information about your vehicle, like its age, make, model, and VIN.

3) Fill out your applications. 

Next, you’ll need to fill out applications from the lenders you’re considering. This will require the documents noted above, and probably some additional ones, as well as basic information about you, your household, your car, and your finances.

4) Review your offers and choose your loan.

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

5) Complete any final paperwork.

After you’ve chosen your loan option, you’ll need to fill out any final paperwork, sign your contract, and finalize your loan. Keep in mind that it will take some 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 been paid off.

Auto Loan Refinancing FAQs

Can I refinance my car with the same lender?

Yes, you can refinance your loan using your current lender. In fact, they may offer you incentives to do so. If they do, you should still shop around and compare your options to make sure you’re getting the best deal.

How much does it cost to refinance a car loan?

Unlike a mortgage refinance, you won’t have a lot of fees when refinancing a car loan. You could potentially incur prepayment penalties for paying off your first loan, as well as lien-holder fees and fees to re-register your vehicle with the state. There are sometimes application fees, too.

How soon can I refinance my car loan?

You generally need to wait at least two to three months to refinance your car loan—enough time for your title to fully transfer. The most important thing is that you refinance when it makes sense for you financially 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, they can 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 may be possible, but it probably would not work in your favor. A lower credit score would mean a higher interest rate 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 slightly. Credit scores are always in flux, though, and if you maintain on-time payments and keep your balances in check, it should recover soon. You can learn more about this process with our guide on how auto refinancing affects your credit.

The bottom line

An auto loan refinance can be a smart way to lower your long-term costs or reduce your monthly payment. Just be sure to time it right, shop around for your lender, and consider any prepayment penalties you may face on your old loan before moving forward.