When Does Refinancing a Car Loan Make Sense?

Refinancing a car loan replaces your current loan with a new one from a different lender, or sometimes the same lender, on new terms. It can lower your rate, change your monthly payment or let you remove a co-borrower. It can also cost you more if you stretch the term or pay fees that cancel the savings. The decision comes down to a few numbers you can check before you apply.

The short answer

Refinancing usually makes sense when at least one of these is true and you still have a meaningful part of the loan left to repay:

• Your credit score has improved since you took out the loan, so you may qualify for a lower rate.
• Market rates have fallen since you bought the car.
• You accepted dealer financing without comparing offers, and your rate looks high next to what lenders now advertise for your credit profile.
• You need a lower payment for budget reasons and understand that a longer term usually costs more interest overall.
• You want to remove a co-borrower or change who is responsible for the loan.

Refinancing usually does not make sense when you are close to the end of the loan, when you owe much more than the car is worth, or when the fees and add-ons on the new loan would outweigh any interest you save.

Why timing matters

Car loans are usually front-loaded with interest. In the early years, a larger share of each payment goes to interest; later on, more goes to the balance. That means a lower rate saves you the most when you refinance early in the loan, while you still have a large balance and many payments left.

If you have only a short time left on your loan, the interest you could save is smaller, and title or documentation fees may eat most of it. In that case, paying off the existing loan as planned is often the cheaper path.

There can also be a practical minimum. Many lenders want the original loan to be recorded and the title or lien information available before they will refinance, and some want to see a history of on-time payments first. Check each company's requirements; some publish them clearly. RefiJet, for example, lists the need for an existing auto loan on your credit history, and OpenRoad Lending lists vehicle age, mileage and payoff limits on its FAQ.

Has your credit improved?

Your credit profile is one of the biggest factors in the rate a lender offers. If you have paid bills on time, reduced credit card balances or had negative items age off your report since you bought the car, you may now look like a lower-risk borrower.

Before you apply anywhere, check your credit reports from the three major bureaus and your current score. If your score has gone up noticeably, you have a good reason to see what lenders will offer. If it has not changed, or has dropped, refinancing is less likely to lower your rate, though it may still change your payment.

Do the payment and total-cost math

The monthly payment is the number most people notice, but the total cost is the number that tells you whether refinancing saves money. To compare:

1. Find your current payoff amount and how many payments you have left. Your current lender can give you a payoff quote.
2. Add up your remaining payments on the current loan. That is what you will pay if you do nothing.
3. Get a quote for the new loan, including the rate, term and every fee.
4. Add up all payments on the new loan, plus any fees you pay upfront or roll into the loan.
5. Compare the two totals. If the new total is lower, refinancing saves you money. If it is higher, you are paying for a lower monthly payment.

A refinance calculator, like the ones many refinance companies offer, can do this for you, but make sure it includes fees and the full term.

The term trap

Stretching a loan over more months lowers the payment because you are spreading the balance out. It also gives interest more time to build up. Some refinance companies offer very long terms, and their sites say so plainly. That flexibility can help in a tight month, but it usually raises the total you pay.

A longer term also means you may owe more than the car is worth for longer, because cars lose value over time. If you need to sell the car or it is totaled, you could owe the lender more than the sale price or insurance payout.

If you can, refinance to a similar or shorter remaining term than you have now. That way, any rate reduction turns into real savings rather than a smaller payment spread over more years.

Check your equity

Lenders look at the loan-to-value ratio: how much you owe compared with what the car is worth. If you owe much more than the car's value, many lenders will not refinance, or will offer a higher rate. Vehicle age and mileage limits also apply. Some companies publish these limits, while others only tell you after you apply.

Before you start, look up an estimate of your car's current value and compare it with your payoff amount. If you are underwater, paying the balance down for a while before refinancing may give you better options.

Fees and add-ons can cancel the savings

Refinancing is not always free. Your state usually charges a fee to transfer the title and record the new lienholder, and some refinance companies charge documentation or administrative fees. Many also offer GAP coverage and vehicle service contracts during the process. These products are optional, and adding them increases the amount you finance and the interest you pay.

Ask for an itemized list of every fee and add-on before you sign, and decline anything you do not need. Our guide to auto refinance fees and add-ons explains what to look for.

Other reasons to refinance

Refinancing is not only about rates. Some people refinance to:

• Remove a co-borrower after a divorce or when a parent no longer wants to be on the loan. You will need to qualify on your own.
• Switch to a lender with better service, autopay options or online account tools.
• Take cash out, which some companies, such as AUTOPAY, offer. This increases what you owe on the car, so treat it as new borrowing and compare it with other options.
• Buy out a lease, which some refinance companies also finance.

When to wait

It may be better to hold off if you have recently applied for other credit, plan to apply for a mortgage soon, or expect your credit to improve in the next few months. A hard inquiry and a new account can affect your score in the short term. Waiting until your credit is stronger may also get you a better offer.

How to start

Compare a few offers before you commit. Several companies say they use a soft inquiry to show estimated offers, which does not affect your credit score, while others run a hard inquiry from the start. Check before you share your details, and do your rate shopping within a short window so multiple auto loan inquiries are more likely to be counted as one.

Our step-by-step guide to refinancing a car loan walks through the process, and our auto refinance rankings compare the major companies on credit checks, fees and eligibility. You can also read how we score companies on our How We Rank page.