Should You Refinance Your Car Loan?
Refinancing a car loan can lower your interest rate or monthly payment, but it doesn't always save money. Here's when refinancing makes sense, when it doesn't, how to calculate your savings, and the steps to refinance.
By Pond.com editors Updated 2 min read
Quick answer
- Refinancing replaces your current car loan with a new one, ideally at a lower interest rate.
- It often makes sense if your credit has improved, rates have dropped, or your dealer loan had a high rate.
- Compare total interest, not just the monthly payment; a longer term can cost more overall.
- It may not be worth it if your loan is nearly paid off, you owe more than the car is worth, or fees are high.
- Shop several lenders using prequalification, which often uses a soft credit check.
If you're paying a high interest rate on your car, refinancing could lower your payment or the total you pay. But it's not automatically a good deal. Here's how to tell whether it makes sense for you.
This article is general information, not financial advice.
How refinancing works
A new lender pays off your existing car loan, and you make payments on the new loan instead. You can change the interest rate, the loan term, or both.
When it usually makes sense
- Your credit score has improved since you got the loan.
- Interest rates have dropped.
- You took dealer financing without shopping around and your rate is high.
- You need a lower payment and accept the trade-offs.
- You want to remove a co-signer from the loan.
When it may not be worth it
- Your loan is almost paid off; most interest has already been paid.
- You owe more than the car is worth.
- Fees or prepayment penalties cancel out the savings.
- Your car is old or high-mileage, which some lenders won't refinance.
- A longer term lowers the payment but raises the total interest.
Do the math
Example: you owe $20,000 with 48 months left at 10% APR.
| Current loan | Refinance at 6%, 48 months | Refinance at 6%, 60 months | |
|---|---|---|---|
| Monthly payment | About $507 | About $470 | About $387 |
| Total interest remaining | About $4,350 | About $2,550 | About $3,200 |
Refinancing at the same term saves about $1,800. Stretching to 60 months lowers the payment much more, but saves less overall, and you'll pay for a year longer.
How to refinance
- Check your credit and know your current loan's payoff amount, rate and months left.
- Find your car's value to see how much equity you have.
- Prequalify with credit unions, banks and online lenders; many use soft checks.
- Compare APR, term, fees and total interest.
- Apply with the best lender; they'll ask for your license, proof of income, insurance and vehicle details.
- The new lender pays off the old loan. Keep paying the old loan until you see it's been paid off.
- Cancel autopay on the old loan once it's closed.
Common questions
Many lenders let you refinance after a few months of on-time payments, once the title has been transferred. Waiting six to twelve months often helps if you're rebuilding credit.
Applying causes a hard inquiry, which may lower your score slightly for a while, and a new account lowers your average account age. Rate shopping within a short period generally counts as one inquiry, and lower payments can help over time.
It's harder. Many lenders limit loans to a percentage of the car's value. You may need to pay down the balance first, or wait until you've built more equity.