What happens when you refinance a car loan
Refinancing a car loan means replacing your current loan with a new one, usually at a different interest rate or over a longer period. The new lender pays off what you still owe on the old loan, and you start making payments to the new lender instead. The main reason people refinance is to lower their monthly payment, either because interest rates have dropped since they took out the original loan or because their credit score has improved.
Your payment can go down in two ways: a lower interest rate reduces what you pay in interest over time, or extending the loan term spreads the remaining balance across more months. Both lower your monthly cost, but extending the term means you pay more interest overall. The trade-off is yours to decide based on your budget and how long you plan to keep the car.
Key Takeaways
- Refinancing works best if your credit score has improved since you took out the original loan, or if market interest rates have dropped significantly.
- You will need your current loan details (balance, rate, remaining term), proof of income, and proof of insurance to start the refinancing process.
- Banks, credit unions, and online lenders all offer car refinancing, and rates vary widely — getting quotes from at least three lenders takes a few hours and costs nothing.
- The refinancing process typically takes one to two weeks from process to funding, and you keep driving your car the entire time.
- Refinancing makes less sense if you owe significantly more than the car is worth, or if you plan to sell or trade in the car within the next year or two.
When refinancing actually saves you money
Refinancing saves money only if the new loan costs less over its lifetime than what you would pay on your current loan. This happens most often when your credit score has risen since you first borrowed — even a 50-point improvement can mean a lower rate. It also happens when market interest rates drop, though you need to check whether the rate drop is large enough to overcome the costs of refinancing.
The math works against you if you are deep into your current loan. If you have only 12 months left to pay, refinancing into a new 60-month loan will lower your monthly payment but cost you far more in total interest. Use an online car refinance calculator (available from most lenders' websites) to compare your current payoff cost against the new loan's total cost before you move forward.
Refinancing also makes less sense if you owe more than the car is worth. Lenders call this being "upside down" on the loan. Most lenders will still refinance, but they may charge a higher rate or require a larger down payment to cover the gap. If you are upside down by more than a few thousand dollars, the savings from a lower rate may not be worth the effort.
Documents and information you will need to gather
Before you contact a lender, collect these items so you can move quickly through the process. You will need your current loan documents or a recent statement showing the loan balance, interest rate, and remaining term. You will also need your vehicle identification number (VIN), which appears on your registration and on the driver's side of the windshield. The lender will use the VIN to verify the car's value and condition.
Have proof of income ready — usually a recent pay stub or tax return. Self-employed borrowers typically need two years of tax returns. You will also need proof of insurance; most lenders require you to carry full coverage (collision and comprehensive) on a financed vehicle, and they will ask to see your current policy. Finally, have your Social Security number and a government-issued ID available, as lenders will run a credit check.
If you have made recent payments or have documentation of your payment history, that can help, but it is not required. Lenders will pull your credit report themselves and see your payment record there.
Where to get refinancing quotes
Three main types of lenders offer car refinancing: banks, credit unions, and online lenders. Banks are the most traditional route and often have competitive rates if your credit is good. Credit unions typically offer lower rates to their members, so if you belong to one, start there — you may not need to look elsewhere. Online lenders move quickly and often have less strict credit requirements, though their rates may be higher than banks or credit unions.
Get quotes from at least three lenders before deciding. Each lender will ask similar questions and pull your credit report, but the rate they offer can vary by a full percentage point or more. A rate difference of even 0.5% on a $20,000 loan can mean $50 to $100 per month in savings. Collect quotes within a short window — a few days — because multiple credit inquiries in a short time count as a single inquiry on your credit report, but inquiries spread over weeks can each lower your score slightly.
When you contact a lender, ask for the annual percentage rate (APR), the loan term they are offering, and the monthly payment. Do not focus only on the monthly payment; a longer term will lower the payment but increase the total cost. Ask whether there are any prepayment penalties — some lenders charge a fee if you pay off the loan early, though this is less common with car loans than with mortgages.
The refinancing process and approval process
Once you have chosen a lender, the process process is straightforward. You will fill out a form with your personal information, employment details, and vehicle information. The lender will order a credit report and may order a vehicle valuation report to confirm the car is worth what you say it is. This usually takes a few days.
The lender will then send you a loan estimate showing the APR, monthly payment, loan term, and total amount you will pay over the life of the loan. Read this carefully and compare it to the quote you received earlier — they should match. If the rate has changed, ask why before you sign. Once you sign the loan estimate, you are committing to the refinance.
After you sign, the lender will contact your current lender to request a payoff quote — the exact amount needed to close your old loan on a specific date. The new lender will then send the payoff amount directly to your old lender, and your old loan closes. You will receive new loan documents and payment instructions for the new lender. The entire process from process to funding typically takes one to two weeks, though some online lenders can move faster.
What happens to your car and your old loan during refinancing
You keep driving your car throughout the refinancing process. The car's title does not change hands — the lien holder (the entity that legally owns the car until you pay it off) changes from your old lender to your new lender. Your old lender will release the lien once they receive the payoff from the new lender, and the new lender will file a new lien in their name.
You are responsible for making your regular payment to your old lender until the new loan funds and the old one closes. If the new loan closes on the 15th of the month and your old payment is due on the 20th, you do not make that payment — the old loan will be closed. The new lender will tell you when your first payment to them is due, which is usually 30 to 45 days after the loan closes.
If you have a gap between when the old loan closes and when the new payment is due, do not assume you have a payment holiday. You are still responsible for the car — it must be insured and registered. Make sure your insurance policy lists the new lender as the lienholder before the old loan closes, or the new lender may require you to purchase their insurance at a higher cost.
Refinancing when your credit is poor or you owe more than the car is worth
If your credit score is low, refinancing is still possible but will be more expensive. Online lenders and some credit unions work with borrowers who have credit scores in the 500s or 600s, though the interest rate will be higher than what borrowers with good credit receive. In some cases, the rate may be only slightly lower than your current rate, which means refinancing will not save you money. Use a calculator to check before you explore.
If you owe more than the car is worth (for example, you owe $18,000 but the car is worth $15,000), some lenders will roll the negative equity into the new loan. This means the new loan amount will be $18,000 plus any fees, even though the car is only worth $15,000. This increases your risk — if the car is damaged or stolen, your insurance will pay only what it is worth, leaving you owing more than you receive. Most lenders will allow this, but a few will not refinance if you are upside down by more than a certain amount.
If you are in this situation, ask the lender directly whether they will refinance and at what rate. Do not assume you cannot refinance; many lenders will, but you need to understand the terms before you commit.
Frequently Asked Questions
Will refinancing hurt my credit score?
Refinancing will cause a small, temporary drop in your credit score because the lender pulls your credit report. The drop is usually 5 to 10 points and recovers within a few months. The benefit of a lower payment or lower rate typically outweighs this temporary dip. Avoid explore to many lenders over a long period, as each inquiry can lower your score; instead, gather quotes within a few days so they count as a single inquiry.
Can I refinance if I am behind on payments?
Most lenders will not refinance if you are currently behind on your car payment. You will need to bring your account current first. Once you have made on-time payments for at least a few months, you become a better candidate for refinancing. If you are struggling with payments, contact your current lender about a loan modification or payment deferment before you pursue refinancing.
What if my car has a lot of miles or is older?
Older cars and high-mileage cars are riskier for lenders because they are worth less and may break down. Some lenders have age or mileage limits — for example, they may not refinance cars older than 10 years or with more than 150,000 miles. Ask the lender about their limits before you explore. Credit unions are often more flexible on this than banks or online lenders.
Do I have to refinance with the same lender?
No. You can refinance with any lender that will approve you. Many people refinance with a different lender to get a better rate. The only requirement is that the new lender pays off the old loan in full, which they do automatically as part of the process.
What if I want to pay off the new loan early?
Most car loans, including refinanced ones, have no prepayment penalty, which means you can pay off the loan early without a fee. Ask the lender whether there is a prepayment penalty before you sign the loan documents. If you plan to pay off the car soon, refinancing into a longer term may not make sense, since you will not benefit from the lower monthly payment.