What To Know About Refinancing Your Car Loan | Bankrate

Refinancing is the process of replacing an existing loan with a new one, typically through a different lender. Most people will use it to reduce their monthly payment — either by getting a lower rate or extending their loan term. 

In general, refinancing is a good idea if it allows you to save money on interest over the course of your loan. But it’s not always a wise financial move, especially in the current economic environment as interest rates continue to rise, so consider it carefully before applying. 

4 tips to follow when refinancing your car loan

Refinancing is a great way to save money on interest and potentially lower your monthly payment. Take your time comparing lenders and finding a good deal — it could mean bigger savings down the road. 

1. Shop around

Before you apply with a lender, shop around and compare interest rates and terms from multiple lenders. All lenders have their own formulas for calculating your rate, so getting more than one quote is important. 

In most cases, you can get preapproved before you submit a full application and receive a rate quote with just a soft credit inquiry, which won’t impact your credit score. Once you have preapproval, you can select the best offer and complete the refinancing process. 

If there’s no preapproval option, keep your applications within a short time frame. The multiple inquiries that show up on your credit report will be combined into one when calculating your credit score as long as they all occur in a short period, typically 14 days. 

2. Consider fees

Before refinancing, consider whether fees will impact your overall savings. Some auto loans have a prepayment penalty in place, which means paying off your loan early can cost you more than you would save by reducing the interest rate. If that is the case, refinancing your auto loan won’t be worth it. 

Some lenders also charge a substantial origination fee when you take out a loan to refinance. Like a prepayment penalty, it can eat into the potential savings and make refinancing more of a hassle than just sticking with your current lender. 

3. Understand how your credit will be impacted

Virtually every time you apply for credit, a hard inquiry will reduce your credit score by a few points. If you then open a new loan trương mục, it will lower the average age of your accounts, which may also lower your credit score. 

That said, both factors are much less important in calculating your credit score than your payment history — and making timely payments on your new loan will increase your score over time. So, unless you have applied for other credit recently or you don’t have a long credit history, refinancing is unlikely to make much of a difference. 


Check where you already have an trương mục

In general, it’s a good idea to start your search for refinancing with financial institutions you already have relationships or accounts with. There are many benefits to this approach.  

To begin with, you may qualify for a loyalty discount on some of the loan fees as a result of your existing relationship with a lender, bank or credit union. If you have a good track record with the financial institution, such as consistently making payments on time or maintaining positive balances in your accounts, it can increase your chances of getting approved for refinancing. 

Alternatively, if your credit score is on the low side, a lender that you already have a relationship with may still be willing to work with you and provide refinancing. 

When should I refinance my car loan?

There is no best time to refinance your car loan — if it saves you money, it is a good time. There are a few situations where refinancing makes the most sense. 

  • Refinance when auto rates have gone down.

    Most car loan interest rates fluctuate based on the prime rate and other factors. Though interest rates are currently trending upward, depending on when you purchased the car you may still be able to find a slightly lower rate. 


  • You have improved your credit score.

    Even if market rates haven’t changed drastically,

    improving your credit score

    may be enough to get a lower rate. If you have improved your credit score since signing up for your initial loan, you may qualify for better loan terms that will reduce your out-of-pocket costs.


  • You got your initial loan from the dealer.

    Dealers tend to charge higher rates than banks and credit unions to make a bigger profit. If you took out your initial loan through dealer-arranged financing, refinancing with a different lender could get you a lower rate.


  • You need lower monthly payments.

    In some cases, refinancing a car loan may be your ticket to a more affordable car payment, with or without a lower interest rate. If your budget is tight and you need to

    reduce your car payment

    , you could refinance your loan to a longer repayment term — but expect to pay more in interest because you are extending the loan.


Requirements to refinance

Lenders determine eligibility differently. Before you refinance, check the requirements for you, your vehicle and your current loan. 

  • A regular source of income, a low debt-to-income ratio and good credit. 


  • Proof of residence, such as a lease agreement, mortgage statement or utility bill.


  • Your car’s make, model, year, vehicle identification number (VIN) and mileage to evaluate your car’s worth.


  • Your loan current balance, monthly payment and payoff amount to determine if you meet its minimum loan requirements.


When refinancing doesn’t make sense

Refinancing a car loan isn’t always the right choice. If you are close to paying off your loan, refinancing may not save you money. Just stick with it unless you desperately need to extend your loan term to reduce your monthly payment. 

Being upside-down on the original loan will also make it difficult to refinance. Lenders typically won’t approve you if you owe more on the car than it is worth. This is also known as being “underwater” on the loan — and it is a tough spot to get out of. 

If your car is older or has quite a few miles on it, lenders may not want to refinance. This usually looks like a vehicle that is 10 model years old or has more than 100,000 miles, although the specifics vary by lender. 

Finally, with interest rates on the rise, you may end up paying more by refinancing in the current market environment. The Federal Reserve has been working to control inflation by increasing the federal funds rate, which in turn causes interest rate increases on everything from credit cards to car loans. Currently, auto loan interest rates range from about 4.8 percent to about 6.6 percent. 

Next steps

The primary reason to consider refinancing is if you can qualify for a lower rate and will save money in the long run. In the current market environment, however, crunch the numbers and be sure you will achieve the savings you’re after. 

It’s also worth considering how much longer you have on a loan before proceeding with a refinance. Depending on where you are in the repayment schedule, your actual savings may not be that significant or worthwhile. Use a car loan refinance calculator to run the numbers for your situation to see how much refinancing can save you.