Should You Refinance Your Car Loan? When It Saves Money and When It Doesn't

You should refinance your car loan if you can get a lower APR or a lower payment without stretching the loan so long that you pay more in total. Refinancing means a new lender pays off your current loan and you start a new one, ideally on better terms. It helps most when your credit has improved or rates have dropped since you bought. It helps least when you're far into the loan or the car is worth less than you owe.

How does refinancing a car loan work?

You apply with a bank, credit union, or online lender. If approved, the new lender sends a payoff to your old lender, and you make payments to the new one. The new loan has its own rate, term, and monthly payment. Your car is the collateral, just as before.

When does it make sense to refinance?

• Your credit score has gone up. If you bought with a lower score, a better score can qualify you for a lower rate. See what credit score you need to buy a car for how lenders tier applicants.
• The rate on your current loan is high. A dealer-arranged loan isn't always the cheapest option. Our guide on dealer versus bank financing explains the tradeoffs.
• You want to remove a cosigner. Refinancing in your name alone can release the person who cosigned.
• Your budget is tight. A lower payment can help, but only if you weigh the extra cost of a longer term.

When should you not refinance?

• You're near the end of the loan. Early payments are mostly interest, so most of the savings are behind you. Later payments are mostly principal.
• You owe more than the car is worth. Many lenders limit how much they'll lend against a car's value. Our post on gap insurance on a used car covers this situation.
• The new term is much longer. A lower payment spread over more months can cost more overall. Read whether a 72-month car loan is a good idea before extending.
• Your loan has a prepayment penalty. Check your current contract for one before applying.

How do you know if refinancing will save you money?

Compare the total cost, not just the monthly payment. Take the new monthly payment, multiply it by the number of months in the new loan, and add any fees. Do the same for what you have left on your current loan. If the new total is lower, refinancing saves money. Compare by APR, not the interest rate alone, since APR includes fees. See the difference between APR and interest rate.

How do you refinance a car loan step by step?

1. Find your current payoff amount, rate, and remaining term from your lender.
2. Check your credit report and score.
3. Get pre-qualified with a few lenders. Pre-qualification usually uses a soft credit check. Read whether pre-qualifying hurts your credit.
4. Compare offers by APR, term, and total cost.
5. Submit a full application with the lender you choose and send the documents they ask for, such as proof of income, registration, and insurance.
6. Keep paying your old loan until the payoff is confirmed, so you don't miss a payment.

What if you're planning to replace the car instead?

If the loan feels like a bad fit because the car no longer suits you, trading in may be a better route. Read can I trade in a car that still has a loan. When you're ready to look at what's available, you can browse Keysy's used car inventory, and see how financing works on our used car financing in Utah page.

FAQ

Does refinancing a car loan hurt your credit?

A full application usually triggers a hard inquiry, which can lower your score slightly for a short time. Pre-qualification typically uses a soft check and doesn't.

How soon can you refinance a car loan?

It depends on the lender. Some require a few months of payment history, and the car must also meet the new lender's age and mileage limits.

Can you refinance with bad credit?

Sometimes, but the rate may not be lower than what you have now. Improving your score first, then comparing offers, usually gives better results.

Can you refinance if you owe more than the car is worth?

It's harder. Many lenders cap the loan at a percentage of the car's value, so you may need to pay down the difference first.

Is it better to refinance or pay off the loan early?

If you have cash available, extra payments toward principal reduce interest without a new application. Refinancing helps when you can't pay extra but can get a meaningfully lower APR.