Refinancing an auto loan involves replacing your original loan with a new one. Most car owners refinance to put themselves financially ahead, whether to reduce their interest rate, lower their monthly payment or both.
Although rates are climbing, you may still save money on an auto loan refinance. Here’s how to refinance a car loan and find a good lender to help with the deal.
Min. Credit Score
|1.25% – 21.24%
|$5,000 – $1,000,000
|24 – 96 months
|1.99% – 17.99%
|$2,500 – $100,000
|24 – 96 months
|4.49% – 8.99% with Autopay (.5% discount)
|$5,000 – $100,000
|24 – 84 months
|Good / Excellent
|$8,000 – $120,000
|36 – 84 months
|2.69% – 8.84%
|$5,000 – $50,000
|24 – 84 months
Auto loan refinance rates typically range from about 3% to 10%. The average rate is 6.8%, the highest recorded in eight years, according to a 2022 report from RateGenius, a refinancing platform. However, most borrowers in the report said they saved at least $50 a month by refinancing.
Generally, a good interest rate is lower than what you’re paying now, says Tim Owens, Bank of America’s consumer vehicle lending executive. The rate you receive depends on your lender, loan term and credit score, with lower rates largely going to customers with good credit scores and shorter terms.
APRs for auto loan refinancing ranged from 1.25% to 29.99% in March 2022. The better your credit score, the lower the rate you may get.
From start to finish, the auto loan refinance process may take a few days, Owens says. Here are the basic steps:
1. Review your current loan. Check your loan documents to figure out the interest you pay each month and the total cost of the loan if you finish the entire term. You’ll use these figures later to determine whether refinancing makes sense.
2. Check your credit. This can help you figure out whether you’ll be eligible for an auto loan refinance. If your credit has improved since you took out the original loan, you may qualify for a lower interest rate to help you save money. Strong credit can also help you leverage one lender’s offer against another to get a better deal.
Each of the three major credit bureaus allows you to check your credit report weekly for free through the end of 2022. Free credit scores may be available from your credit card issuer or bank, or you can try free credit score apps.
3. Gather your documents. You will need to share personal, vehicle and loan information with your lender to refinance. Personal information might include your government-issued photo ID, employer’s contact information, proof of income and Social Security number. The lender will also ask for your vehicle identification number, registration and mileage, plus your loan payoff amount and term.
4. Prequalify with several lenders. A prequalification uses a soft credit pull, which helps you shop for offers without hurting your credit. You might be able to get prequalified with your current lender along with a mix of online lenders, credit unions, and local and national banks.
Once you have a few offers in hand, compare the annual percentage rates, loan terms, monthly payments, fees, prepayment penalties and total interest you’ll pay over the life of each loan. “Compare what you’re paying today by what you could potentially pay by refinancing,” Owens says.
5. Check your budget. Go through your monthly expenses and make sure you can comfortably manage the new car payment. Loans with longer repayment terms generally come with lower monthly payments and higher interest rates, which means you’ll pay more interest overall. A shorter term comes with higher monthly payments and less interest over the life of the loan. If you’re not sure you can afford higher payments, consider taking out a loan with a longer term and paying more toward the principal when you can.
6. Apply for the loan. The lender will likely run a hard credit pull, which can temporarily lower your credit score. Also, the lender will verify your income and employment status and may separately appraise your car. Always read the contract before you sign for a loan, and ask questions if something is unclear.
7. Start payments on the new loan. You can begin to pay the new lender when the old loan is paid off. The new lender should pay off the loan balance from the previous lender once your loan is approved and you sign the paperwork. Contact the previous lender to make sure this happens correctly, and ask for a payoff document.
You may want to refinance your auto loan when it helps you financially, including when:
Your original loan doesn’t have a prepayment penalty. This means you could pay off the loan early without being charged a fee. Check your contract to verify whether the loan comes with a prepayment penalty. If you can’t find the contract, call the lender’s customer service department.
You’ll save on interest. When you refinance an auto loan with a lower interest rate, you can save on the monthly payment and the total interest. For instance, dropping the interest rate from 14% to 7% on a $15,000 car loan can save you $52 a month and $3,120 over five years. Your savings partly depends on how much interest you’ve already paid toward the original loan.
You want to remove a co-signer or co-borrower. If you signed for the original auto loan with someone else, you can remove that person from the loan by refinancing into a new one.
You want to lower your monthly payment. You can also refinance an auto loan to a longer term, which lowers your monthly payments. This can make room in your budget, although you may pay more interest over the life of the loan.
But auto loan refinances aren’t right for everyone, says Paris Chevalier, president and CEO of South Bay Credit Union. She cautions against refinancing if you owe more than your car is worth or your original loan has high prepayment penalties.
The best auto loan refinance lender is one that offers low interest rates, charges few or no fees, and accepts the type of vehicle you have. Note that lenders may place age, mileage or make constraints on refinancing. Here are some factors to evaluate as you compare auto loan refinancing lenders:
Type of institution. Every lender sets its own terms and interest rates on auto loan refinances, so it’s a good idea to shop with a mix of banks, credit unions and online lenders. Credit unions own most of today’s auto refinance market, according to the credit bureau TransUnion. These financial institutions generally charge lower rates than banks do on loan products.
Credit score requirement. The average credit score of auto refinance borrowers was 670 in 2021, according to the RateGenius report. Because every lender sets its own credit score requirement, you can make sure that you will likely qualify.
If your credit hasn’t improved much since you took out the original loan, you may have trouble finding a lender willing to refinance to a lower rate. However, some lenders work with borrowers who have lower credit scores.
Restrictions. Check that you meet all requirements to refinance with the lender. You may only be able to refinance your auto loan with a different lender, for instance. Lenders may also have minimum and maximum loan amounts, offer rates based on a car’s model year and mileage, and restrict loans to personal-use cars.
Fees. Even if lenders offer attractive interest rates, they may add fees and penalties that increase the cost of borrowing. When comparing offers, look for origination fees and prepayment penalties, and ask whether the lender can raise the interest rate during the loan term.
Discounts. “If you have a relationship with a bank or credit union, start there,” Owens says, “because they may offer discounts for being a client.” But check other financial institutions, too, because they may offer incentives when you enroll in autopay or open a checking account.
Reputation. Make sure you’re working with a trustworthy lender. Ask friends and family members which lenders they’ve used, or look up a company using the Better Business Bureau and the Consumer Financial Protection Bureau’s Consumer Complaint Database.
Refinancing an auto loan can affect your credit in a few ways. The first change may happen after you apply for the new loan because this creates a hard credit pull. The hard inquiry may stay on your credit report for up to two years and may temporarily lower your credit score by a few points.
If you submit multiple loan applications within a short time frame, generally between 14 and 45 days, depending on the credit score model, they will typically only count as one inquiry. This lessens the impact on your credit.
Refinancing can also lower the average age of your credit accounts because you close the old loan and start a new one. Shortening your average credit history may hurt your credit score.
However, the potential hit to your credit score is “a small price to pay if the new loan saves you money or helps you avoid car payments you can no longer afford,” Chevalier says.
The effect may be temporary. Over time, your credit can rebound if you make on-time payments on all of your accounts each month.
To answer this question, you will need to figure out what you qualify for and how much you would pay in interest on both the original loan and the new loan. You’ll also need to look over both contracts to check whether you lose services and pay fees on the new loan.
- Saving money on interest.
- Lowering the monthly payment.
- Paying fees when taking out the new loan.
- Potentially paying more interest over the life of the loan.
- Owing more on the loan than the car is worth.
- Terminating products included in the original loan, such as gap insurance.
Your car loan payment may have seemed manageable when you took it on, but if it “no longer works due to changes in your financial situation, there are options available that don’t require taking out a new loan,” Chevalier says.
Contact your loan servicer and ask about loan modifications. Your servicer may be willing to lower your interest rate or extend the loan term to reduce your monthly payment, Chevalier says.
Lenders usually want to help you afford payments because “repossessions are costly and time-consuming,” she adds.
Your lender may also let you defer payments for a few months until you’re on solid financial ground. Make sure you get any loan modification or payment deferral agreements in writing, and ask the lender how your account will be reported to the credit bureaus.
Another option is trading in your car for a less expensive one if you don’t owe more than what your car is worth. “The difference between the trade-in value and what is owed on your current loan will lower the new loan amount,” Chevalier says.
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