Can You Refinance a Car Loan? Here’s When It’s Worth It

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Car loan refinancing is a smart option for many borrowers — but it’s not always the right fit for everyone. If you’re wondering, can you refinance a car loan, the answer is yes, as long as you meet the lender’s credit and income requirements.

This guide breaks down how refinancing a car loan works, when it’s worth considering, and the pros and cons to watch out for during the process.

What Is Car Loan Refinancing?

An auto loan refinance involves taking out a new auto loan to pay off an existing loan. Generally, borrowers pursue a refinance to tap into lower interest rates, a lower monthly payment, or both. A lower monthly payment might be on the table if you can get a lower interest rate or longer loan term.

After an auto loan refinance, you’ll have a new loan with a different monthly payment secured by the same car you already own.

5 Reasons To Refinance a Car Loan

For drivers with an existing auto loan, there are several reasons to consider refinancing. Some of the most popular reasons include:

• Lower interest rates:
  • If you are able to get a lower interest rate, you could potentially save hundreds or thousands of dollars over your loan term.
  • Depending on the situation, lower interest rates might be possible if you’ve improved your credit score or interest rate market conditions have changed.
• Reduce monthly payments:
  • Depending on your situation, refinancing could lead to lower monthly payments.
  • You could get lower interest rates or a longer loan term to get a lower monthly payment.
  • Although a lower monthly payment will free up some space in your budget, stretching out the loan could lead to paying more in interest charges overall.
• Pay off your loan faster:
  • If you want to get out of debt ahead of schedule, you could refinance into a shorter loan term.
  • Of course, you could also opt to make higher monthly payments without officially refinancing.
• Remove a cosigner:
  • If someone cosigned your loan to help you obtain a vehicle, refinancing in your name only can release them from this financial obligation.
  • For borrowers with an improved credit score, refinancing to remove a cosigner could be well worth it.
• Switch lenders:
  • If you don’t enjoy working with a particular lender, refinancing to a different lender could offer a better experience. After all, some lenders offer better customer service experience than others.

When To Consider Refinancing

Refinancing a car loan is a worthwhile option for some. Here’s when it might make sense:

• Your credit score has improved. If your credit score has increased since you initially took out the loan, you might have access to more favorable loan terms with a refinance.
• Market interest rates have dropped. If the market currently supports lower interest rates for your auto loan, then refinancing could help you take advantage of those lower rates.
• You want to make space in your budget. If you need to free up space in your monthly budget, refinancing could help you obtain a lower monthly payment.
• Your car is worth more than the loan balance. If your car is worth more than the loan balance, it could make refinancing a useable option.

When Refinancing Isn’t Worth It

Refinancing a car loan doesn’t always make sense. Here’s when it might not work for your situation:

• Your loan is almost paid off. If you have a short amount of time remaining on your loan, then the hassle of refinancing might not make sense. Generally, if you have less than a year left on your auto loan, refinancing isn’t necessary.
• Your car is worth less than the loan balance. For borrowers with a car worth less than the remaining loan balance, refinancing can be difficult.
• Your credit score has dropped. If your credit score has fallen since taking out the loan, it’s unlikely you’ll land better loan terms through a refinance.
• Your auto loan has prepayment penalties. Some auto lenders impose prepayment penalties on borrowers who choose to repay their loans early. If your auto loan has a prepayment penalty included, then a refinance might not make sense.

How To Refinance a Car Loan: Step-by-Step Guide

If you want to refinance your car loan, use the steps below as a guide:

1. Check your credit score. Generally, a higher credit score leads to better refinancing options.
2. Review your current loan terms. Take a look at your current loan to find out your interest rate, remaining balance and loan term.
3. Compare lenders. Shopping around to compare offers across different banks, credit unions and online lenders can help you find the most affordable options for your situation.
4. Apply for prequalification. Many lenders offer pre-approval without affecting credit scores. You can use these prequalification tools to explore your options.
5. Submit your application. Be ready to provide information about your existing loan, details about your current vehicle and verification of your financial information.
6. Review and accept the offer. Before you commit to a loan, read the fine print to avoid any confusion later. Make sure the refinance actually leads to savings over time.
7. Pay off your old loan. Once the new loan is finalized, the new lender should pay off your old loan for you. But it’s important to confirm the loan is properly closed to avoid any issues down the line.

Pros and Cons of Refinancing a Car Loan

Every financial decision comes with advantages and disadvantages. Take a look at both sides of refinancing a car loan below.

Pros

• Lower interest rates. If you can tap into a lower interest rate, could save money on interest charges for the remainder of your loan.
• Lower monthly payments. If your refinance results in a lower monthly payment, you’ll have more breathing room in your budget.
• Short loan terms available. If you opt for a shorter loan term, you’ll pay off your car ahead of schedule.
• New lender could mean better service. When you refinance with a new lender, you might enjoy better customer service from the new lender.

Cons

• Longer loan terms can increase costs. If you extend your loan term, you’ll likely pay more in interest charges over the life of your loan.
• Credit score might dip. When you apply for new credit, your credit score often decreases a bit. Although this is an issue, your score may recover quickly if you stick to making on-time payments going forward.
• Fees. Depending on the situation, refinancing might involve fees that cut into the amount you actually save.

How Much Can You Save by Refinancing?

The amount you can save through a refinance varies based on your unique situation. But it’s often possible to save hundreds or thousands in interest charges after a refinance.

Here are a few examples of how much you could save:

Conclusion

Refinancing an auto loan is possible in many situations. For some borrowers, going through the refinance process leads to a lower monthly payment, which frees up some room in your budget going forward. But a refinance isn’t always the best option for your situation.

It’s important to weigh out the benefits against the downsides of your situation to determine whether or not a refinance makes sense for you.

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