What happens when you refinance a car loan?
The process to refinance an auto loan is simple. You apply for an auto refinance loan just as you would any other type of auto loan. Typically, you will have to apply with a new lender, because few lenders will refinance their own loans.
You will be able to choose the term for the new loan. This can be the same as the number of months remaining on your current loan, or you can shorten or extend it. Terms available from auto refinancing lenders vary, but a range of 24 to 84 months is the most common.
Extending the length of your car loan when you refinance will lower your monthly payments, but you will pay more interest over the life of your loan. It can also put you at risk of owing more than your car is worth, which is called being upside-down on your auto loan.
When you’re approved for an auto refinance loan, it provides funds to pay off and replace your current vehicle loan. In most cases, your refinance lender will take care of paying off your current loan. You then start making monthly, and hopefully lower, payments on the new loan.
The final step when refinancing is having a new car title issued to replace the lienholder (lender that has your loan) with the new lender. Many lenders will handle the title transfer for you. In some states, you may also need to re-register the car.
Refinancing may lower your credit scores if the lender uses a hard credit inquiry, but the drop is temporary and won’t have a long-term effect on your credit.
Should you refinance your auto loan?
Borrowers refinance car loans for different reasons. They may need to remove a co-borrower from an existing auto loan. Or they may want to shorten the loan term to pay it off sooner. Two of the most common reasons for refinancing a car are to reduce expenses and save money.
Refinancing your car loan makes sense:
If your credit has improved. If you’ve made consistent, on-time payments for six to 12 months since getting your car loan, and the lender has been reporting these payments to the credit bureaus, you might now qualify for a lower interest rate.
If a car dealer marked up your interest rate. When you got your original loan, the car dealer might have charged you a higher interest rate than you could have qualified for elsewhere — or can still qualify for with refinancing.
If you can’t keep up with payments. Refinancing to extend the length of the loan can lower your car payments, but don’t take this step lightly. Extending the loan term means you will pay more interest and more in total over the life of the loan, but that’s still a better option than missing payments or facing repossession.
If interest rates drop. If auto loan rates in general fall lower than when you first got your car loan, refinancing could be an opportunity to take advantage of these lower rates.
NerdWallet’s auto loan refinance calculator can help you compare loans and rates to determine how much you could save with refinancing.
When is the best time to refinance a car loan?
Some lenders will refinance an auto loan as soon as you can provide information about your existing loan and lender. If you settled for an extremely high auto loan rate to escape a dealership, and you have good credit (FICO score of 690 and up), then refinancing to a lower rate as soon as possible may be a good idea.
On the other hand, if your blemished credit history resulted in a high auto loan APR, you might wait six to 12 months and keep paying on your existing loan. You generally need a history of six to 12 months of on-time payments, with no new negative items on your credit report, to make auto refinancing worthwhile or even possible with some lenders.
Who are the best auto loan refinance lenders?
The best auto refinancing lender for you may be different than the “best” for someone else. The higher your credit scores and the stronger your credit history, the more lender choices you will have with lower rates.
Nearly all banks and credit unions, known as direct lenders, offer auto loan refinancing. Your current bank or credit union might be a good place to start — especially if they offer a rate reduction for automatic payments. But most will not refinance their own auto loans.
Online loan marketplaces that work with a network of refinancing lenders are another option, and some specialize in auto loan refinancing. They provide the convenience of applying to many lenders with one loan application, but this can also lead to receiving calls, texts and emails from multiple lenders.
Lenders have different limits for car mileage and age, as well as the minimum amount a person can borrow, so make sure your needs fit within a lender’s requirements before you apply.
Applying to several auto refinance lenders and comparing offers give you the best chance of finding the lowest-rate loan with the shortest term. Make sure all applications are within a two-week window, so any hard credit inquiries are counted as one and have less effect on your credit scores.
Can you refinance a car loan with bad credit?
Refinancing your auto loan can be difficult if you have bad credit, but it might still be possible. Some lenders have minimum credit score requirements as low as 500. NerdWallet’s reviews of auto loan refinancing lenders show the minimum credit score for most.
But if your bad credit hasn't improved since getting your original loan, you will most likely have trouble finding a lender willing to refinance to a lower rate.
If you’re having trouble making car payments, talk to your current lender right away (before missing any payments). Some lenders have options to assist you that don’t require refinancing.
Can you get money back when you refinance a car loan?
If your car is worth substantially more than you owe on it, some lenders allow what is known as cash-out auto refinancing. You borrow more than you owe on your current loan, pay off that lender and take the remainder in cash.
Interest rates for cash-out refinancing may be lower than those on a credit card or personal loan because the loan is secured by your car. But overborrowing against your car comes with risks. If your car is totaled or you eventually want to sell it, you might not receive enough from insurance or the buyer to pay off your loan balance. You would then be responsible for paying the remainder of the loan.