To refinance a car loan, you take out a new loan from a different lender (or sometimes your current one) that pays off the old loan, ideally at a lower interest rate. It makes the most sense when your credit has improved, rates have dropped, or you accepted a high dealer rate when you bought the car. The process usually takes a few days to two weeks.
The savings can be real. Experian’s data for the second quarter of 2026 shows borrowers who refinanced moved from an average original rate of 10.40% to 7.97%, saving about $83 a month on average, and they did it roughly 26 months into the original loan. Below are the steps, the paperwork, the fees and a worked example so you can check whether it pays for you.
When refinancing makes sense
Refinancing helps most when you can cut your rate by a meaningful amount without stretching the loan much longer. Good signs include:
- Your credit score has climbed since you bought the car, for example from the near-prime range into prime.
- You took dealer financing without shopping, and outside lenders now offer you a noticeably lower rate.
- Market rates have fallen since your loan started.
- You want to remove a co-signer, or add one to qualify for a better rate.
- Your monthly budget is tight and you need a lower payment, even if it costs more in total.
Rate differences by credit tier are large. Experian’s Q2 2026 figures put average new-car loan rates at 4.41% for super-prime borrowers (781 and up), 6.15% for prime (661 to 780) and 9.71% for near prime (601 to 660). For used cars, the averages were 6.29%, 8.81% and 13.93%. Moving up even one tier can shave several points off a used-car loan.
When it probably doesn’t pay
Refinancing is less helpful if you’re near the end of the loan. Car loans front-load interest, so by the last year or two most of your payment goes to principal, and a lower rate saves little. It’s also a weak idea if your current loan has a prepayment penalty that wipes out the savings, or if the new lender’s fees eat up most of the difference.
Watch the term, too. A lower payment that comes from adding two years to the loan can cost you more in total interest, even at a lower rate, and keeps you in debt on an aging car.
How to refinance a car loan, step by step
- Check your current loan. Find your payoff amount, interest rate, remaining months and whether there’s a prepayment penalty. Your lender’s online account or a quick call will give you a 10-day payoff quote.
- Check your credit. Get your free reports at AnnualCreditReport.com and fix any errors before applying. Knowing your score helps you target lenders that fit your profile.
- Estimate your car’s value. Use a valuation guide to see what the car is worth. Lenders compare the loan amount to the car’s value (the loan-to-value ratio) and may limit how much they’ll lend.
- Prequalify with several lenders. Credit unions, banks and online lenders often offer prequalification with a soft credit check, which doesn’t affect your scores.
- Apply within a short window. When you submit full applications, do it within about two weeks. FICO scoring treats multiple auto loan inquiries within a 14-day window (45 days in newer versions) as a single inquiry.
- Compare offers on total cost. Look at APR, term, monthly payment, fees and the total you’ll pay over the life of the loan.
- Sign and let the new lender pay off the old loan. The new lender sends the payoff directly. Keep paying the old loan until you confirm it shows a zero balance, so you don’t miss a payment during the switch.
- Handle the title. The new lender is added as lienholder on your title. Depending on your state, this may happen electronically or require you to sign forms and pay a state fee.
Documents you’ll need
Lenders ask for similar paperwork. Having it ready speeds things up:
- Driver’s license or other government ID, and your Social Security number
- Proof of income, such as recent pay stubs, tax returns or bank statements if you’re self-employed
- Proof of residence, such as a utility bill or lease
- Vehicle details: VIN, year, make, model, mileage and current registration
- Current loan information: lender name, account number and payoff amount
- Proof of insurance that meets the new lender’s requirements
Refinancing fees to expect
Car loan refinancing is usually cheaper than refinancing a mortgage, but it isn’t always free. Common costs include:
- Title transfer or lien recording fees charged by your state when the new lender is added to the title
- Re-registration fees in states that require it after a lien change
- Application or processing fees at some lenders (many charge none, so ask)
- A prepayment penalty on your old loan, if your contract has one
State fees vary widely, so check your motor vehicle agency’s fee schedule. Add every cost together and subtract it from your projected interest savings before deciding.
A worked savings example
Here is how the numbers can play out over the remaining term, comparing keeping the old loan, refinancing for the same remaining term, and refinancing for a longer term.
| Option | Rate | Months left | Monthly payment | Total remaining payments | Savings vs. keeping loan |
|---|---|---|---|---|---|
| Keep original loan | 13.19% | 48 | About $565 | About $27,115 | None |
| Refinance, same term | 7.97% | 48 | About $512 | About $24,575 | About $2,540 |
| Refinance, longer term | 7.97% | 60 | About $425 | About $25,510 | About $1,605 |
Example: Maria financed $28,000 on a used SUV through the dealer at 13.19% for 72 months, with a payment of about $565. Two years later her score has improved and she owes about $20,980. A credit union offers 7.97% for the remaining 48 months, dropping her payment by about $53 and cutting her total remaining payments by roughly $2,540. After about $150 in state title fees, she comes out about $2,390 ahead and finishes on the same date.
Example: If Maria instead chose a 60-month refinance, her payment would fall by about $140 a month, which is attractive if her budget is tight. But she would pay for an extra year and save only about $1,605 in total, about $935 less than the same-term option. That trade-off is worth knowing before you pick the lowest payment.
Refinancing when you’re upside down
Being upside down (or underwater) means you owe more than the car is worth. This is common in the first couple of years of a loan, especially with small down payments or long terms. It makes refinancing harder because lenders don’t like lending more than the collateral is worth.
Some lenders will still refinance up to their own loan-to-value limit, while others require the loan to be at or below the car’s value. If you’re underwater, you can pay down the balance with cash to reach an acceptable ratio, wait until regular payments shrink the gap, or apply with a co-borrower who has stronger credit. Avoid rolling negative equity into an even longer loan, which can leave you more underwater later. If your car is financed above its value, also check that you have gap coverage in case the car is totaled.
How refinancing affects your credit
The effect is usually small and short-lived. Each full application creates a hard inquiry, which can trim a few points for a while, but rate shopping within a short window is generally counted as one inquiry by FICO scores. The new loan also lowers the average age of your accounts slightly.
Over time, on-time payments on the new loan help your credit just as they did on the old one. The bigger risk is a missed payment during the switch, which is why you should keep paying the original lender until the payoff is confirmed.
Common questions
How soon can I refinance a car loan?
Many lenders will consider a refinance once the title has been issued with the original lienholder, which can take a couple of months after purchase. Some lenders also want a few months of on-time payments first. Check each lender’s rules on loan age, vehicle age and mileage.
Does refinancing a car hurt your credit?
It can cause a small, temporary dip from the hard inquiry and the new account. Applying to several lenders within about 14 days keeps the inquiry impact to one, and on-time payments rebuild your score over time.
Can I refinance with bad credit?
Yes, but the savings depend on whether your credit has improved since you got the original loan. If your score and income are about the same, you may not qualify for a lower rate. Adding a creditworthy co-borrower or waiting until your score rises can help.
Is it worth refinancing for 1% lower interest?
It can be if you have a large balance and several years left. On a small balance near the end of the loan, a 1% drop may save less than the fees. Compare total remaining payments, minus all fees, before deciding.
Can I get cash out when I refinance a car?
Some lenders offer cash-out auto refinancing if you have equity in the car. It raises your loan balance and interest cost, and can leave you underwater if the car loses value quickly, so it’s usually best reserved for necessary expenses.
Before you apply
- Get a current payoff quote and check for a prepayment penalty.
- Pull your credit reports and look up your car’s value.
- Prequalify with at least three lenders, including a credit union.
- Submit full applications within about two weeks.
- Compare the total cost of each offer, including all fees, along with the monthly payment.
- Keep paying the old loan until the payoff is confirmed.
The Consumer Financial Protection Bureau explains auto loan terms and your rights as a borrower, and AnnualCreditReport.com provides your free credit reports.
Editorial note: This article is general information, not financial advice. Rates and averages were checked as of October 2026 and the example is illustrative, so confirm terms, fees and payoff details with your current lender and any new lender before refinancing.