What does refinancing a car mean?

Refinancing means getting a new loan to replace the loan you already have. Refinancing a car loan is typically straightforward and may save you money. Still, many factors affect whether you can or should pursue it.

What happens when you refinance a car?

When your new, refinanced loan is approved, your new lender will pay off your old loan, and you'll start making loan payments to your new lender. If the lender is the same, they'll retire your old loan and issue a new loan that you'll start making payments on instead. If you are thinking of trading in your car, learn more about trading in a vehicle with a loan.

Can I refinance my car with the same lender?

Yes, many lenders will allow you to refinance your existing car loan. Keep in mind that lenders may not offer refinancing as an option. Especially if your vehicle is in poor condition, has low value, or you have few payments remaining on your existing loan.

How does refinancing a car work?

Refinancing a car loan works almost the same way as the original car loan process. You can shop around for the best offer. You can get multiple offers within about two weeks, with it only counting as one inquiry on your credit history. And you'll need to provide almost all the same documentation you provided for your original loan. Learn more about the documents necessary for getting an auto loan.

Is refinancing a car worth it?

Although everyone's situation is different, these are the common reasons why you might refinance a car loan.

Better credit

If your credit score and credit history have improved since your car loan, refinancing may provide lower interest rates. You may also get shorter loan terms, which would reduce the total amount you'll pay for your car.

Better interest rate

Generally, interest rates change over time. Also, some lenders make limited-time offers with special rates for refinancing. A lower interest rate means you'll pay less money in total over the life of the loan.

Better income circumstances

Maybe you're making more money, you've paid off debts, or both since you first got your car loan. You may be able to get better loan terms from a lender by refinancing as a result because of your improved debt-to-income ratio.

Protecting credit

If you find yourself in a situation where it's harder to pay your bills on time, you may be able to refinance to get a lower monthly payment. It may extend the loan term, which means you'll pay more for your car. But refinancing can help prevent the potentially more significant issues of late payments or defaults on your credit history.

When refinancing a car loan may not be a good idea

With issues such as, prepayment penalties, loan fees and upcoming major purchases, the costs may mean refinancing isn't worth it.

If your current car loan has a prepayment penalty, you'll need to determine whether the savings of refinancing outweigh the penalty you'll pay.

Your lender may charge specific fees to get a loan going — origination fees and title transfer fees, to name a few possibilities. You'll want to get a clear picture of the total costs of those fees to ensure you'll still come out ahead.

Are you about to apply for a loan for a separate large purchase? The credit inquiries for refinancing a car loan will reduce your credit score by a few points for a while. If your current score is between a higher and lower tier of credit, the effect of the car refinance may prevent you from getting the best terms on that other loan. And paying higher interest will cost you more money in the long run.

When will a lender refuse to refinance a car loan?

You may have been asking yourself, "Should I refinance my car loan?" but in some cases, the better question is, "Will a lender want to refinance my car loan?" There are some cases where they may not. It's good to consider those cases before applying and potentially affect your credit score.

  • The state of the car: Older cars or vehicles with a lot of mileage may not be considered for refinancing offers. Additionally, the age and mileage considerations may differ depending on the make and model of your car. It's best to find out before you apply. Learn more about how car mileage impacts insurance.
  • The value of the car: You may have heard the term "loan-to-value" ratio before. In this case, if the value of the vehicle is lower than the amount of the new loan you want, a lender is unlikely to approve a refinancing.
  • The time left on your current loan: You want to refinance because it's better for your finances. The lender wants to improve its finances, too! The closer you are to paying off your existing loan, the less likely a new lender will refinance it.