Can You Refinance a Car Loan? Everything You Need to Know
If you’re like most car owners, your monthly auto loan payments take up a good chunk of your budget. Over time, you might wonder: “Can I refinance my car loan to get a better deal?” The answer is yes—auto loan refinancing could help you lower your interest rate, reduce monthly car payments, and even pay off your vehicle faster.
This guide explains how refinancing works, when it makes sense, and what to watch out for, including tips for getting approved by the best auto refinance lenders.
What Does It Mean to Refinance a Car Loan?
Refinancing a car loan means replacing your existing loan with a new one, typically with better terms. The new lender pays off your current balance, and you start making payments on the new loan.
Drivers usually refinance to:
- Secure a lower interest rate – Ideal if rates have dropped or your credit score has improved.
- Reduce monthly car payments – Extending your loan term makes payments more affordable.
- Pay off your car sooner – A shorter term means fewer interest charges over time.
- Change lenders or loan terms – Move away from a lender with poor service or remove a co-signer.
When Is Auto Loan Refinancing a Good Idea?
Refinancing makes sense if you can save money or better manage your payments. Consider refinancing if:
- Interest rates have fallen since you took your original loan.
- Your credit score has improved, giving you access to lower refinance car loan rates.
- You’re struggling with high monthly payments and need a longer term.
- You want to add or remove a co-signer for personal or financial reasons.
However, if you’re close to paying off your car, the potential savings may not outweigh refinancing fees.
How to Refinance Your Car Loan in 5 Steps
1. Check Your Credit Score
Your credit score requirements play a huge role in determining your refinance rate. Many lenders prefer scores above 660, though bad credit auto loan refinancing options do exist. Improving your score first can lead to lower rates.
2. Review Your Current Loan
Know your loan balance, remaining term, and interest rate. Compare these with current auto refinance rates to see if a switch makes sense.
3. Shop for the Best Auto Refinance Lenders
Compare offers from banks, credit unions, and online lenders. Use pre-qualification tools to check potential rates without affecting your credit.
4. Apply for the New Loan
Submit your application with required details: your personal information, proof of income, and car details like mileage, VIN, and model year.
5. Close the Deal
If approved, your new lender pays off your old loan. You’ll now make payments under your new loan, ideally with lower monthly car payments or a shorter term.
Pros and Cons of Refinancing a Car Loan
Benefits
- Potential for lower interest rates and reduced overall costs.
- Ability to manage monthly car payments more easily.
- Option to adjust loan terms, add, or remove co-signers.
- Possible savings on interest with a shorter repayment term.
Drawbacks
- Extending the loan term can mean paying more interest overall.
- Some lenders charge prepayment penalties.
- Negative equity (when you owe more than your car’s value) can make refinancing difficult.
Can You Refinance a Car Loan with Bad Credit?
Yes, you can. While it’s easier to qualify with a good credit score, many lenders specialize in bad credit auto loan refinancing. Expect higher interest rates, but even a slight reduction can still help if your current rate is very high. Consider improving your credit score before applying to secure better terms.
Does Refinancing Hurt Your Credit Score?
Refinancing usually requires a hard credit inquiry, which may drop your score by a few points temporarily. However, consistent on-time payments on your new loan can help your credit recover and even improve over time.
When Should You Avoid Refinancing?
Refinancing might not be worth it if:
- Your loan has high prepayment penalties.
- You’re nearly finished paying off your current auto loan.
- Your car has depreciated significantly, leaving you with negative equity.
In these cases, sticking with your current loan or paying it off early may be smarter.
Final Thoughts
So, can you refinance a car loan? Absolutely—but only if the numbers work in your favor. Refinancing can lead to lower interest rates, better monthly car payments, and improved loan terms, especially if your credit score has improved or market rates have fallen.
Always compare offers from multiple auto refinance lenders and check pre-qualification options to ensure you’re getting the best deal. With the right timing and preparation, auto loan refinancing can be a powerful tool to save money and achieve greater financial flexibility.