Auto Loan Refinancing 101

Could you be paying hundreds less each month? Here's everything you need to know about refinancing your auto loan.

What Is Auto Loan Refinancing?

Auto loan refinancing means replacing your current car loan with a new one—ideally with better terms. Think of it like trading in your old loan for an upgraded version.

When you refinance:

1. A new lender pays off your existing loan
2. You start making payments to the new lender
3. You (hopefully) save money through lower rates, lower payments, or both

The key insight: Your creditworthiness today may be very different from when you first got your loan. Rates change. Your credit score changes. Your car's value changes. Refinancing lets you take advantage of these shifts.

When Does Refinancing Make Sense?

The Math That Matters

Refinancing typically makes sense when you can check at least one of these boxes:

✅ Interest rates have dropped If market rates are 1% or more below your current rate, refinancing could save you real money.

✅ Your credit score has improved Jumped from 620 to 720? You might qualify for rates 3-5% lower than your original loan.

✅ You're paying a "bad timing" rate Did you finance during a period of high rates (like 2023-2024 when rates hit 20-year highs)? Today's rates might be significantly better.

✅ You need lower monthly payments Extending your loan term can reduce monthly payments—though you'll pay more interest overall.

✅ Your current loan has unfavorable terms High fees, prepayment penalties, or dealer markup on rates are all reasons to refinance.

The Quick Savings Calculator

Here's a rough guide to potential savings:

These are estimates. Actual savings depend on loan amount, remaining term, and fees.

When Refinancing Doesn't Make Sense

Be cautious if:

❌ You're near the end of your loan Most of your early payments went to interest. Refinancing now restarts that clock.

❌ Your car has high mileage or low value Lenders have restrictions—many won't refinance cars over 100,000 miles or worth less than $5,000-$7,000.

❌ You're underwater on the loan If you owe more than the car's worth, refinancing options are limited.

❌ Prepayment penalties apply Some loans charge fees for paying off early. Calculate whether savings exceed penalties.

❌ The rate difference is minimal Less than 1% savings rarely justifies the paperwork and potential hard credit pull.

How Auto Loan Refinancing Works

Step 1: Know Your Current Loan

Before shopping, gather:

• Current loan balance
• Interest rate (APR)
• Monthly payment
• Remaining months
• Payoff amount (may differ from balance due to prepaid interest)

Step 2: Check Your Credit Score

Your credit score is the biggest factor in the rate you'll get:

Pro tip: Check your score for free through Credit Karma, your bank, or AnnualCreditReport.com. Checking your own score doesn't affect it.

Step 3: Get Your Car's Value

Lenders calculate loan-to-value (LTV) ratio. Most prefer:

• LTV under 125% (you owe less than 125% of car's value)
• Some strict lenders require under 100%

Check your car's value at Kelley Blue Book, Edmunds, or NADA Guides.

Step 4: Shop Multiple Lenders

Critical: Apply to multiple lenders within a 14-day window. Credit bureaus treat this as a single inquiry, not multiple hits to your score.

Where to look:

• Credit unions - Often the lowest rates (must be a member)
• Online lenders - Quick process, competitive rates
• Banks - Existing relationship may help
• Specialized refinance companies - Built specifically for auto refi

Step 5: Compare Offers (Look Beyond the Rate)

Evaluate the total picture:

• APR (includes fees)
• Loan term options
• Monthly payment
• Total interest paid over life of loan
• Origination fees
• Prepayment penalties on new loan

Step 6: Accept and Complete

Once you choose:

1. Complete application with chosen lender
2. Provide documentation (ID, proof of income, current loan info)
3. New lender pays off old loan
4. You start paying new lender

Types of Auto Loan Refinancing

Rate-and-Term Refinance

Goal: Lower your interest rate while keeping a similar loan term Best for: People with improved credit or who financed during high-rate periods

Extended Term Refinance

Goal: Lower monthly payments by stretching the loan longer Best for: People who need cash flow relief Watch out: You'll pay more total interest

Shortened Term Refinance

Goal: Pay off the car faster with higher monthly payments Best for: People who can afford higher payments and want to save on total interest

Cash-Out Refinance

Goal: Borrow more than you owe and pocket the difference Best for: Emergencies only—this increases your debt Availability: Limited; most auto lenders don't offer this

Top Auto Refinancing Lenders (2025)

Best for Strong Credit: LightStream

Why it stands out: LightStream (a division of Truist Bank) offers unsecured auto loans—meaning your car isn't collateral. No vehicle restrictions on age or mileage.

Best for Average Credit: Caribou

Why it stands out: Built specifically for auto refinancing with a streamlined process.

Best for Comparison Shopping: myAutoloan

Why it stands out: See offers from multiple lenders with one application.

Best for Credit Union Rates: PenFed

Why it stands out: Credit union rates without requiring existing membership.

Common Refinancing Mistakes

Mistake #1: Only Checking One Lender

Rates vary significantly. Always get 3-5 quotes.

Mistake #2: Ignoring Total Cost

A lower monthly payment with a longer term often means paying MORE over the life of the loan.

Example:

• Original: $400/month for 36 months = $14,400 total
• Refinanced: $300/month for 60 months = $18,000 total
• "Savings" that cost you $3,600

Mistake #3: Extending Too Long

While lower payments help cash flow, don't extend beyond when your car will reasonably last or maintain value.

Mistake #4: Forgetting About GAP Insurance

If you have GAP coverage through your current loan, refinancing may cancel it. Make sure you're still protected if needed.

Mistake #5: Waiting Too Long

The best time to refinance is typically 60-90 days after your original loan (after payment history is established) or as soon as your credit improves. Waiting too long means less loan balance to save on.

The Refinancing Timeline

Total time: Usually 2-3 weeks from start to finish.

Refinancing FAQ

Q: Will refinancing hurt my credit score? A: Temporarily, yes. The hard inquiry may drop your score 5-10 points. But if you shop within 14 days, multiple inquiries count as one. Making on-time payments on the new loan will help your score recover.

Q: How soon after buying can I refinance? A: Most lenders require 60-90 days of payment history. Some allow immediate refinancing.

Q: Can I refinance with the same lender? A: Some lenders allow it, but you'll likely get better rates by shopping around.

Q: What if I'm underwater on my loan? A: Options are limited. Some lenders refinance up to 125% LTV. You may need to pay down the balance first.

Q: Do I need to tell my current lender? A: No. The new lender handles paying off the old loan.

The Bottom Line

Auto loan refinancing can save you hundreds or thousands of dollars—but only if the math works in your favor. Before refinancing:

1. Know your numbers - current rate, balance, car value
2. Check your credit - understand what rates you'll qualify for
3. Shop multiple lenders - within a 14-day window
4. Calculate total cost - not just monthly payment
5. Act when it makes sense - don't wait if savings are available now

The best refinancing decision is an informed one. Use calculators, compare multiple offers, and make sure the savings justify any fees or credit impact.

Ready to see if refinancing makes sense for you? Use our auto loan refinancing calculator to estimate your potential savings.

Related Articles:

• How to Improve Your Credit Score Before Refinancing
• Credit Union vs. Bank: Where to Get the Best Auto Loan Rates
• When to Refinance vs. Pay Off Your Car Early

Last updated: January 2025