How to Refinance Your Car Loan
What refinancing a car loan means and when it makes sense
Refinancing a car loan means replacing your current loan with a new one from a different lender. The new lender pays off what you still owe on the old loan, and you start making payments to them instead. You keep the same car — the lender just changes.
People refinance for three main reasons: to lower the interest rate (which reduces your monthly payment or the total interest you pay), to change the loan term (making payments smaller or larger), or to get out of a loan with a co-signer. Refinancing makes the most sense if interest rates have dropped since you took out your original loan, your credit score has improved, or you're paying a rate significantly higher than what new borrowers are getting.
The catch is that refinancing costs money upfront — application fees, title transfer fees, and sometimes prepayment penalties on your original loan. You need to calculate whether the monthly savings will cover those costs before the loan ends. A refinance that saves you $50 a month but costs $300 in fees takes six months to break even.
Key Takeaways
- Refinancing replaces your current car loan with a new one, usually from a bank, credit union, or online lender, and you keep the same vehicle.
- The main benefit is a lower interest rate if rates have dropped or your credit has improved, but you pay upfront fees that can range from $0 to several hundred dollars.
- You need to know your current loan balance, remaining term, and interest rate before you contact lenders, and you can get this from your loan documents or by calling your current lender.
- Most lenders will not refinance a car worth significantly less than what you owe, and some have age or mileage limits on vehicles they will refinance.
- The entire process from application to funding usually takes one to two weeks, though some credit unions and online lenders move faster.
Gather your loan details before contacting lenders
Before you reach out to any lender, pull together the information they will ask for. You need your current loan balance (what you still owe, not what you originally borrowed), your interest rate, your remaining loan term in months, and the vehicle identification number (VIN) from your car's title or registration. Your current loan documents or your lender's website will have all of this.
You also need to know the car's current market value, because lenders will not refinance if you owe more than the car is worth — a situation called being "underwater" on the loan. You can check value on Kelley Blue Book, NADA Guides, or Edmunds by entering your car's year, make, model, and mileage. If you owe $15,000 and the car is worth $12,000, most lenders will decline.
Have your recent pay stubs and bank statements ready. Lenders want to see that your income is stable and that you have money in the bank. If you have changed jobs in the last two months or have very little in savings, mention that upfront — some lenders care more than others, and it is better to know before you apply.
Compare rates from banks, credit unions, and online lenders
You have three main sources for a refinance loan: traditional banks, credit unions, and online lenders. Banks are the slowest but often have the most flexible terms. Credit unions typically offer lower rates if you are a member, and many allow you to join based on where you live or work. Online lenders move fastest — some fund within days — but their rates vary widely depending on your credit score.
Contact at least three lenders and ask for a rate quote. Most will give you a preliminary rate without a hard credit pull, which means it does not affect your credit score. Tell them your loan balance, term, vehicle value, and credit score range (you can check your own score free through annualcreditreport.com). Ask specifically about prepayment penalties on your current loan — if your original lender charges one, that cost comes out of your savings.
When you compare offers, look at the total interest you will pay over the life of the new loan, not just the monthly payment. A lender offering a lower rate but a longer term might cost you more in the long run. Ask whether there are application fees, title transfer fees, or other costs built into the loan, and whether the rate is locked in or could change before closing.
Understand what happens to your credit during refinancing
When you apply for a refinance, the lender will do a hard credit inquiry, which temporarily lowers your credit score by a few points. Multiple inquiries within 14 days usually count as one inquiry for scoring purposes, so if you are shopping around, do it quickly. Your score will recover within a few months as long as you make on-time payments on the new loan.
Refinancing also closes your old loan account and opens a new one. This can affect your credit in two ways: your average account age drops (which lowers your score slightly), and your credit utilization changes if you have other debts. These effects are temporary. The bigger risk is if refinancing tempts you to take on new debt — that is what actually damages your credit long-term.
If your credit score is below 620, most lenders will decline or offer rates higher than your current one. In that case, refinancing does not make sense. Focus instead on paying down other debts and making on-time payments for six months, then revisit refinancing.
Complete the application and provide documentation
Once you have chosen a lender, you will fill out a formal application. This is where the lender does the hard credit pull and asks for full documentation. You will need to provide recent pay stubs (usually the last two), recent bank statements (usually the last two months), and proof of income if you are self-employed (tax returns from the last two years). Have your driver's license and Social Security number ready.
The lender will also order a vehicle inspection report, which is an automated check of the car's title history and whether there are any liens against it. This usually happens without you doing anything — the lender handles it. If the car has a salvage title or has been in a major accident, some lenders will decline.
Be honest about any gaps in employment, recent moves, or changes to your financial situation. Lenders find out anyway through background checks, and lying on the application can result in the loan being rescinded after you have already paid off the old one. If something looks unusual on your credit report, ask the lender to explain it before you sign anything.
Review the loan terms and closing documents
Before you sign, the lender will send you a Loan Estimate, which shows the interest rate, monthly payment, total interest over the life of the loan, and all fees. Read this carefully and compare it to what you were quoted. The rate should match, and the fees should be what you discussed. If anything is different, ask the lender to explain before you proceed.
Pay special attention to the payoff amount for your current loan. The new lender will pay this to your old lender, but if there is a gap between when the old loan is paid off and when you make your first payment to the new lender, you might owe a few days of interest. Ask the new lender how they handle this — most cover it, but some pass it to you.
You will also sign a new promissory note and a security agreement, which gives the new lender a lien on the car. This is standard. The lender will handle the title transfer with your state's motor vehicle department, so you do not have to go to the DMV yourself. After closing, you will receive new loan documents and payment instructions.
Make your first payment and confirm the old loan is paid off
Your new lender will tell you when your first payment is due. This is usually 30 to 45 days after closing. Make that payment on time — missing it immediately after refinancing can trigger default clauses and undo any benefit you gained.
Within two to three weeks of closing, log into your old lender's website or call them to confirm the loan has been paid off and your account is closed. You should see a zero balance. If you still see an outstanding balance, contact the new lender immediately — this usually means the payoff did not go through, and you need to fix it before interest accrues.
Keep your new loan documents in a safe place. You will need them if you sell the car, refinance again, or have a dispute with the lender. Update your insurance company with the new lender's name and address so they know who holds the lien on the vehicle.
Frequently Asked Questions
Can I refinance a car I still owe money on?
Yes, that is the whole point of refinancing. As long as you owe less than the car is worth and your credit is acceptable to the lender, you can refinance. If you owe more than the car is worth, most lenders will decline, though some credit unions will refinance if you are a member and have a good payment history with them.
What if my current lender charges a prepayment penalty?
Some lenders charge a fee if you pay off the loan early. This fee comes out of your savings, so you need to factor it into your decision. Ask your current lender whether there is a prepayment penalty and how much it is. If the penalty is large, refinancing might not save you money.
How long does refinancing take from start to finish?
Most lenders take one to two weeks from application to funding. Online lenders and credit unions sometimes move faster — as little as three to five business days. Banks are usually slower. Once the new lender funds the loan, it takes another few days for the payoff to reach your old lender and for the title to transfer.
Will refinancing hurt my credit score?
Refinancing causes a small temporary drop in your credit score because of the hard inquiry and the new account. The drop is usually five to ten points and recovers within a few months if you make on-time payments. The long-term benefit of a lower interest rate usually outweighs this temporary dip.
What if I have a co-signer on my current loan and want to remove them?
Refinancing is one way to remove a co-signer, but only if your credit and income are strong enough that the new lender will approve you alone. If the new lender requires a co-signer, you have not solved the problem. Ask the lender upfront whether you can be approved without a co-signer before you apply.