Updated: Feb 21, 2025

Looking for ways to reduce your monthly car payment or get a lower interest rate? Check out how auto refinancing can help you save money and improve your financial situation.

If you’re struggling with high car payments or think you’re paying too much interest on your auto loan, refinancing might be a smart move. Auto refinancing allows you to replace your current loan with a new one—ideally with better terms, a lower interest rate, or lower monthly payments. Many people don’t realize that just like a mortgage, car loans can be refinanced to save money over time.

In this guide, we’ll cover how auto refinancing works, when it makes sense, and what to consider before applying.

What Is Auto Refinancing?

Auto refinancing is when you replace your existing car loan with a new one, usually from a different lender. The new loan pays off the remaining balance on your original loan, and you begin making payments on the new loan with updated terms. The goal of refinancing is usually to:

✅ Get a lower interest rate
✅ Reduce monthly payments
✅ Shorten or extend the loan term
✅ Remove a co-signer
✅ Switch lenders for better service

Refinancing works best when market interest rates have dropped, your credit score has improved, or your financial situation has changed.

How Does Auto Refinancing Work?

The process of refinancing your auto loan is similar to applying for the original loan. Here’s how it works:

1. Check Your Current Loan – Review your loan balance, interest rate, and monthly payment details.
2. Check Your Credit Score – A higher score can help you qualify for better rates.
3. Compare Lenders – Shop around for the best refinancing offers.
4. Apply for Pre-Approval – Submit your application with the required documents (proof of income, vehicle details, etc.).
5. Choose a New Loan – If approved, pick a loan with better terms that fit your needs.
6. Pay Off Your Old Loan – The new lender pays off your existing loan.
7. Start Payments on Your New Loan – Make sure to follow the new payment schedule.

The entire process can take anywhere from a few days to a couple of weeks, depending on the lender.

When Should You Refinance Your Auto Loan?

Refinancing isn’t always the best option, but here are some situations when it makes sense:

✅ Your Credit Score Has Improved

If your credit score has increased since you got your original car loan, you may qualify for a lower interest rate, saving you money in the long run.

✅ Interest Rates Have Dropped

If market rates have decreased, refinancing could help you secure a lower rate and reduce your monthly payments.

✅ You’re Struggling with High Payments

If your current car payment is too high, refinancing to a longer loan term could reduce your monthly bill and free up cash for other expenses.

✅ You Want to Pay Off Your Car Faster

If you can afford higher payments, refinancing to a shorter loan term can help you pay off your car sooner and save on interest.

✅ You Want to Remove a Co-Signer

If someone co-signed your loan and you want to remove them, refinancing under your own name is a good option.

When NOT to Refinance Your Auto Loan

Refinancing isn’t always a smart financial move. You might want to skip refinancing if:

❌ Your current loan has a prepayment penalty – Some lenders charge fees for paying off your loan early.
❌ You owe more than your car is worth – If your car is worth less than your loan balance (negative equity), refinancing may not be helpful.
❌ Your car is too old – Some lenders won’t refinance loans for vehicles over a certain age or mileage.
❌ You’re close to paying off your loan – If you have less than a year left on your loan, refinancing may not save you much money.

Pros and Cons of Auto Refinancing

✅ Pros

✔ Lower Interest Rate – A lower rate means less money paid in interest over the life of the loan.
✔ Lower Monthly Payment – Extending the loan term can reduce your monthly payment, making it easier to manage your budget.
✔ Pay Off Your Loan Faster – Shortening the loan term can help you become debt-free sooner.
✔ Better Loan Terms – You may get a lender with better customer service, no prepayment penalties, or more flexible payment options.

❌ Cons

✘ May Extend Your Loan Term – A longer loan term could mean paying more in total interest.
✘ Possible Fees – Some lenders charge application fees, origination fees, or prepayment penalties.
✘ Credit Score Impact – Applying for a refinance results in a hard credit inquiry, which can temporarily lower your credit score.
✘ Negative Equity Issues – If your car’s value is lower than your loan balance, refinancing may not help.

How to Qualify for the Best Auto Refinance Rates

If you want to secure the best refinancing deal, follow these tips:

✔ Improve Your Credit Score – Pay down debt and make on-time payments to boost your score.
✔ Shop Around for Lenders – Compare multiple lenders to find the lowest interest rates.
✔ Know Your Car’s Value – If your car is worth less than your loan balance, refinancing may not be an option.
✔ Consider a Shorter Loan Term – If you can afford higher payments, a shorter term can save you money on interest.
✔ Avoid Extra Fees – Read the fine print to avoid hidden charges.

Where to Refinance Your Auto Loan

Many financial institutions offer auto refinancing, including:

🏦 Banks – Traditional banks like Wells Fargo, Chase, and Bank of America offer auto refinance loans.
💳 Credit Unions – Often provide lower rates and better terms than big banks.
📱 Online Lenders – Companies like LightStream, LendingClub, and Caribou specialize in auto refinancing with quick applications.
🚗 Your Current Lender – Some lenders offer refinancing for existing customers, but it’s worth comparing other options.

How Much Can You Save with Auto Refinancing?

The amount you can save depends on your loan balance, interest rate, and term. Here’s an example:

• Current Loan: $20,000 balance, 8% interest, 5-year term
• Refinanced Loan: $20,000 balance, 4% interest, 5-year term
• Total Savings: Over $2,000 in interest over the life of the loan

Final Thoughts

Auto refinancing can be a great way to lower your interest rate, reduce your monthly payments, or pay off your loan faster. However, it’s important to compare lenders, check for fees, and make sure refinancing makes financial sense for your situation. By understanding your options and shopping around for the best deal, you can save money and take control of your car loan.