It’s common for car owners to consider refinancing their vehicle loan, especially if they have a loan with bad terms. These terms can either be an extended repayment period or a high interest rate.


If you refinance correctly you can save quite a bit of money in the long run. Not only can you reduce your monthly payments but you can also reduce the interest rate and change the length of the loan.


Many auto owners take advantage of refinancing to get their loan away from the dealer provided financing and into the hands of the bank they normally deal with.

Why Refinance Your Auto Loan?

There are several reasons to refinance a car. The idea that you can save money in the long-run is at the top of the list. According to TransUnion, car owners lower their interest rate by an average of 2.4% when they refinance their car. That translates to around $50 per month they reduce their monthly payment by.


List of reasons to refinance your car:

  • Lower Interest Rate: You’ll usually get a lower interest rate the 2nd time around as your situation has improved.
  • Decrease Monthly Car Payment: If you lower your interest rate or even put more money down during the refinancing process, you’ll likely see your monthly payment decrease.
  • Shorten the Loan Term: A shorter loan term means you can pay off your car sooner.
  • Incentives: Some places offer incentives to refinance with them or even cash-back offers.
  • Change to Primary Financial Institution: A lot of owners will refinance to take advantage of the above but also to move their business to their local institution (especially if they got dealer financing).

Pros and Cons of Refinancing a Car Loan

An automotive refinance can be helpful in some situations but it doesn’t fit every situation. A refinance almost always reduces your interest rate and lowers your monthly payment. Those are the two key outcomes of a refinance. There is no other reason to refinance a car loan unless you really have to.


Pros of a Car Loan Refinance:

  • Opportunity to reduce your interest rate.
  • Refinancing can extend the length of the loan lowering your payment even more.
  • Allows you to restructure your budget and potentially clean up debt faster.

Cons of a Car Loan Refinance:

  • Can be costly in the long-run.
  • Can make you pay on the same debt longer than intended or desired.
  • Sometimes a higher interest rate may apply if your situation got worse.

Should You Refinance a Car Loan?

There are a lot of things to consider when refinancing a car loan. You are the only person who can answer if you should refinance your car and that depends on your situation.


Things to consider before refinancing:

  • Refinancing Requirements: There may be more requirements needed for refinancing from different institutions.
  • Prepayment Penalties: You may have to pay a fee to end your current loan early (most do not charge prepayment penalties).
  • Interest Rates: It may not be the best time (market wise) to refinance since interest rates are higher than normal.
  • Credit Score: If your credit score has increased it may be a good reason to refinance for a better rate.
  • Income: A lower monthly payment can free up monthly cash flow to help pay other bills or save.
  • Remaining Time on Loan: If you’re over half way through your loan there is almost zero reason to refinance unless you’re going to refinance for a shorter term to match your current time remaining.

How to Refinance Your Car Loan

The process to refinance a car loan is actually really similar to getting a loan for a new or used car. You will start with a loan application, receive an approval or denial, and get the funds to pay off your old car loan.


In many cases refinancing a car loan is much easier than the initial process of getting a new car loan or a used car loan.


The best time to refinance a car is when your credit has improved substantially.

Steps to Refinance a Car

  1. Check your credit. You’ll want your credit to be substantially higher before you go through the process. To get the very best rates you’ll want to have a score higher than 720 but we wouldn’t suggest refinancing unless your score is above 660.
  2. Estimate your car’s loan-to-value ratio. As soon as you buy a car it starts to tack on depreciation. You’re “underwater” on your car loan the moment you drive it off the lot and you stay underwater for quite some time. To be underwater it means you owe more than the car is worth. If you’re underwater on your loan you will have a difficult time refinancing.
  3. Review your current loan for penalties. Make sure you won’t be charged any prepayment penalties or closing costs.
  4. Consider the remaining time on your loan. If you have already paid over 50% of your current loan it might not make sense to refinance. You just spent the last few years paying almost entirely interest and a small percentage toward your car.
  5. Get the required documents ready. You’ll need your personal information (license, social security, etc.), income information and verification, car information, and loan information.
  6. Shop around. You’ll want to get quotes from several refinancing companies and lenders before making a decision.
  7. Apply for the right loan.