How to Refinance a Car Loan and When a Longer Term Costs More
A lower rate can save real money on a car loan. Stretching the term to cut the payment can wipe out those savings.
Refinancing a car loan means a new lender pays off your current loan and you repay the new lender, ideally at a lower interest rate. It saves money when the new rate is lower and the term is not much longer; stretching the term to shrink the payment usually raises the total interest you pay, as the Consumer Financial Protection Bureau (CFPB) warns.
The process takes a few days to a few weeks and is mostly paperwork between the two lenders and your state’s title office.
Who offers auto loan refinancing?
Banks, credit unions and online lenders refinance auto loans. Your current lender may also offer to change your rate or term, though it has less reason to compete for a loan it already holds.
Credit unions often require membership, which can depend on where you live or work. Online lenders usually let you check a rate with a soft credit inquiry first. The CFPB’s auto loan shopping guide notes that credit scoring models generally count several auto loan inquiries made within a short window, roughly 14 to 45 days depending on the model, as a single inquiry. Do your rate shopping in one short stretch.
What do lenders check before they refinance?
Lenders look at you and at the car. A refinance is approved when both the borrower and the collateral fit the lender’s rules.
- Credit score and history. A score that has risen since you took the original loan is the most common reason refinancing pays off.
- Income and debt-to-income ratio. Expect to show recent pay stubs or tax returns.
- Loan-to-value. The lender compares the payoff amount with the car’s value. If you owe more than the car is worth, many lenders will decline or limit the loan, and CFPB research found some borrowers could not refinance because they were “upside down.”
- Vehicle age and mileage. Many lenders set limits on how old the car can be and how many miles it has.
- Payment history. A record of on-time payments on the current loan helps.
If you owe more than the car is worth, our guide to upside-down car loans covers ways to close the gap before you apply.
What fees and penalties should I check first?
Read your current contract for a prepayment penalty, then ask the new lender for every fee in writing. Some loans charge a fee for paying off early, and that cost comes out of your savings.
| Possible cost | Who charges it | Where to find it |
|---|---|---|
| Prepayment penalty | Current lender | Your current loan contract |
| Origination or application fee | New lender | Loan estimate or disclosures |
| Title or lien transfer fee | State DMV or titling office | State DMV fee schedule |
| Re-registration fee in some states | State DMV | State DMV fee schedule |
If your original loan included add-ons such as credit insurance, GAP or a service contract, paying off the loan early may entitle you to a partial refund. The CFPB says you may get a refund of credit insurance when you sell, refinance or prepay. Ask the provider in writing. Our explainer on GAP insurance covers how GAP refunds usually work.
How does refinancing work, step by step?
- Get a payoff quote from your current lender. It is valid for a set number of days and includes interest to that date.
- Check your credit reports and score, and find the car’s VIN, mileage and current value.
- Get rate offers from two or three lenders within a short period, and compare the APR, term and fees.
- Apply with the lender you choose and send the documents it asks for: ID, proof of income, proof of insurance and the vehicle details.
- Sign the new loan. The new lender sends the payoff directly to the old lender.
- Keep paying the old loan until it confirms payoff, so you do not miss a due date during the switch.
- Watch for the lien change. The old lender releases its lien and the new lender is recorded on the title, often electronically. Your state may mail a new title or a notice.
Update the lienholder on your insurance policy, since lenders require you to list them as loss payee.
Does a longer term save money?
A longer term lowers the monthly payment but usually costs more interest overall. The example below uses a $20,000 balance and standard loan math, before fees.
| Loan | Monthly payment | Total interest |
|---|---|---|
| Current: 9% APR, 48 months left | $497.70 | $3,889.64 |
| Refinance: 6% APR, 48 months | $469.70 | $2,545.63 |
| Refinance: 6% APR, 72 months | $331.46 | $3,864.96 |
Keeping the same 48 months at the lower rate saves about $1,344 in interest. Stretching to 72 months cuts the payment by about $166 a month, but total interest ends up almost the same as the original loan, and you stay in debt two years longer while the car keeps losing value.
When does refinancing not make sense?
Refinancing rarely pays off when the rate drop is small, the fees are high or most of the interest is already paid.
- Near the end of a loan, most of each payment goes to principal, so a lower rate saves little.
- A prepayment penalty or new-loan fee can erase the savings on a small balance.
- If you claim the federal car loan interest deduction, a refinance can affect whether the loan still qualifies. Our guide to the car loan interest deduction explains the rules, and a tax professional can confirm your case.
If you are refinancing because you cannot make payments, the CFPB suggests asking your current lender about options such as a deferment or modification, and getting any agreement in writing.
Bottom line
Refinance when your credit or market rates have improved enough to cut the APR, and keep the term close to what is left on your current loan. Compare total interest and fees, not the monthly payment alone, and confirm the payoff and lien release before you stop paying the old lender.
FAQ
How soon can I refinance a car loan?
Many lenders will refinance once the original loan and title paperwork are complete, though some set a minimum wait. The title must usually be recorded with the first lender before a second lender can take over.
Does refinancing hurt my credit score?
A hard inquiry and a new account can lower a score slightly for a short time. Rate shopping within a short window limits the effect, according to the CFPB.
Can I refinance with the same lender?
You can ask, and some lenders will modify the rate or term. Compare their offer with outside lenders before you accept.
Can I take cash out when refinancing a car?
Some lenders offer cash-out auto refinancing if the car is worth more than you owe. It raises the balance and total interest, so treat it like any other new loan.
