What is auto refinancing?

Refinancing a car involves getting a new loan to pay off and replace your current one. You begin making payments on the new loan, which usually has a lower interest rate or different repayment period. (You’ll sometimes hear auto refinance loans referred to as auto refi loans.)

The pros and cons of auto loan refinancing can include the following — although your actual benefits will depend on your situation and the auto refinance loan you choose.

Pros of refinancing

• Paying less in interest.

• Lowering your monthly car payment.

• Paying your loan off earlier.

• Tapping your car’s equity to get cash.

Cons of refinancing

• Paying more in interest if you extend the term.

• Paying lender fees or to re-register your car.

• Risk of becoming upside down on your loan.

Can you refinance a car loan?

Sometimes, people are more familiar with refinancing their home than their car, but auto loan refinancing is a common way to reduce monthly and long-term costs when paying for a vehicle. It can be an excellent way to replace a “bad loan,” realize the benefits of dropping interest rates or take advantage of improved credit.

Whether you personally can refinance will depend on whether you and your vehicle meet lender requirements for refinancing a car. Eligibility requirements can vary from lender to lender — another reason to shop more than one auto refinancing lender.

As with any auto loan, approval of your auto refinancing loan and the interest rate you receive will depend on factors like your credit score, loan payment history and debt-to-income ratio. Also some lenders will have restrictions on vehicle age and mileage, or they may have time requirements for how soon you can refinance after getting the original loan.

Should you refinance your car loan?

Borrowers refinance auto loans for different reasons, with the most common being reducing an auto loan rate to save money. But you may have other reasons for wanting to refinance a car, such as changing the loan length or removing a co-borrower from the current loan.

Here are some situations when it could make sense to refinance your car:

1. If your credit has improved: If you’ve made consistent, on-time payments for 6 to 12 months since getting your car loan, and the lender has been reporting these payments to the credit bureaus, you might now qualify for a lower interest rate.

2. If a car dealer marked up your interest rate: When you got your original loan, the car dealer might have charged you a higher interest rate than you could have qualified for elsewhere — and can still qualify for with refinancing.

3. If you can’t keep up with payments: Refinancing to extend the length of the loan can lower your car payments, but don’t take this step lightly. Extending the loan term means you will pay more interest and more in total over the life of the loan, but that’s still a better option than missing payments or facing repossession.

4. If interest rates drop: If auto loan rates in general fall lower than when you first got your car loan, refinancing could be an opportunity to take advantage of lower auto refinance rates.

What are current auto refinance rates?

Auto refinance rates vary by lender and borrower, but you can get a general idea about rates in the current market. NerdWallet regularly requests auto refinance rates (both the highest and lowest possible) from the lenders and aggregators that we review. You can find the auto refinance rates provided by each lender and aggregator as part of its review.

In general, auto loan rates have increased over the past two years, reaching their highest level in more than two decades. With the Federal Reserve keeping the federal funds rate elevated to curb inflation, auto loan rates also remained high and refinancing to a lower rate wasn’t likely.

The good news is that interest rates, including auto loan rates, are expected to start declining in late 2024. This will probably be a slight easing of rates over time, so at what point will auto loan rates drop enough to make refinancing attractive again? The answer to that question depends on each borrower’s current loan rate.

As rates change, you can use an auto loan refinance calculator to compare your existing auto loan with a new one. Input APRs for both loans, along with the loan terms, to see at what APR your monthly savings would be enough to make refinancing a good idea.

» Try our auto loan refinance calculator

↑ Jump back up to the list of refinancing lenders

What’s the process for refinancing a car loan?

Completing the loan application to refinance a car is usually pretty simple, but it’s a good idea to do some preparation to ensure auto loan refinancing makes sense for you.

1. Review details about your existing loan. If you aren’t certain of your current APR, determine that. Find out how many months are left on the loan and the payoff amount. You will need this information as well, if you proceed with applying for an auto refinancing loan.

2. Estimate your car’s value. Use resources like Kelley Blue Book or Edmunds to figure what your vehicle is worth. If you owe more on the loan than the car’s value, called having negative equity, you may have difficulty refinancing. 

3. Evaluate your credit. Get a copy of your credit report and credit score for free. Knowing where your credit stands can help you gauge whether you might qualify for a loan with a lower interest rate than you have now.

4. Apply to lenders that offer pre-qualification. If you decide to pursue auto refinancing, look for lenders that offer pre-qualification with a soft credit check, which won’t affect your credit score. You’ll get pre-qualified loan offers with rate, term and payment estimates, but know that details can change as you move forward and a hard credit inquiry is done. 

5. Compare and select an auto refinancing lender. An auto loan refinancing calculator can help you compare lender offers with your current loan, including seeing how much a lower APR could save you. When choosing a lender, also compare fees and repayment terms. When you move forward with a lender, expect a hard credit inquiry which may cause a temporary drop in your credit scores

6. Decide on the length of your new loan. Your new loan term can be the number of months remaining on your current loan, or you can shorten or extend it. A longer term can lower your monthly payment, but you’ll pay more interest over the life of the loan and could become upside-down on your loan. Common auto refinancing terms range from 24 to 84 months, but this can vary by lender.

7. Once approved, finalize paperwork and pay off the old loan. Your new auto refinance loan provides funds to pay off and replace your current loan. In most cases, your refinance lender will pay off the existing loan, and you start making monthly, and hopefully lower, payments on the new loan.

8. Transfer the car’s title. The final step when refinancing is having a new car title issued to replace the lienholder (lender that has your loan) with the new lender. Many lenders will handle the title transfer for you. In some states, you may also need to re-register the car.

» MORE: How to refinance your car loan

How soon can you refinance a car loan?

The best time to refinance a car is when auto loan rates drop, and you can get a better loan — but that’s the simple answer. Here are a few timing considerations for when you can and should refinance a car loan.

Refinancing a car loan right away: Some lenders will refinance an auto loan as soon as you can provide information about your existing loan and lender. If you settled for an extremely high auto loan rate to escape a dealership, and you have good credit (FICO score of 690 and up), then refinancing to a lower rate as soon as possible may be a good idea.

Waiting to refinance an auto loan: Some lenders have a waiting period of several months before they’ll refinance an auto loan. And, if you have a high auto loan APR because of poor credit, choosing to wait six to 12 months before refinancing can improve your chances of getting a better loan. You generally need a history of six to 12 months of on-time payments, with no new negative items on your credit report, to make auto refinancing worthwhile or even possible with some lenders.

Who are the best auto loan refinance lenders?

The best place to refinance your car may be different than the “best” for another borrower. Applying to several auto refinance lenders and comparing offers will give you the best chance of finding the lowest auto refinance rates with the shortest term for which you can qualify.

Here are some things to think about when you’re considering where to apply for an auto refinance loan.

• Online loan aggregators are a convenient way to apply to multiple auto refinancing lenders at once to find the lowest rate. However, depending on the aggregator you choose, you could end up receiving calls, texts and emails from many of these lenders.

• Nearly all banks and credit unions offer auto loan refinancing, and online loan applications enable you to cast a wider net outside of your community. Your current bank or credit union is also a good place to apply — especially if they offer a rate reduction for automatic payments from an existing checking or savings account.

• Most lenders won’t refinance their own auto loans to a lower rate, but a few will — sometimes for a fee. 

• Lenders have different limits for car mileage and age, as well as the minimum amount a person can borrow, so make sure your needs fit within a lender’s requirements before you apply.

• Make sure all applications are within a two-week window, so any hard credit inquiries are counted as one and have less effect on your credit scores.

Typically, the higher your credit scores and the stronger your credit history, the more lender choices you’ll have for lower auto refinancing rates.

↑ Jump back up to the list of refinancing lenders

Can you refinance a car loan with bad credit?

Refinancing an auto loan when you have bad credit can be difficult, but it might still be possible. Some lenders have minimum credit score requirements as low as 500. NerdWallet’s reviews of auto loan refinancing lenders show the minimum credit score for most.

But if your low credit score hasn't improved since getting your original loan, you’re likely to have trouble finding a lender willing to refinance to a lower rate. If you’re having trouble making car payments, talk to your current lender right away (before missing any payments). Some lenders have options to assist you that don’t require refinancing.

When is auto loan refinancing not a good idea?

Auto loan financing has many benefits, if in fact it enables you to end up with a better auto loan and improve your financial situation. But there are times when refinancing your car may not be a good idea. Here are a few examples: