Key takeaways

  • Refinancing allows you to swap out your current loan for a new one, preferably with a better interest rate or extended term, to lower your monthly payment and overall borrowing costs.
  • Despite recent rate hikes, it's possible to get a lower interest rate if you have a high credit score.
  • It may not be in your best interest to refinance if the costs associated with the transaction will outweigh the benefits.

Refinancing involves replacing an existing loan with a new one, typically through a different lender. Most people will use it to reduce their monthly payments by getting a lower rate or extending their loan term. But is refinancing a car worth it for you?

Auto loan refinancing is generally a good idea if it allows you to save money on interest. But it’s not always a wise financial move, especially as interest rates continue to rise, so think carefully before applying.

When should I refinance my car loan?

There is no best time to refinance your car loan — if it saves you money, it is a good time.

To illustrate, imagine the remaining balance on your auto loan is $18,000. Your current monthly payment is $450, and you have four years remaining on the loan term. You get approved for a four-year auto loan, but the refinance interest rate will be 5 percent instead of the 8 percent you currently pay.

Your monthly payment will drop to $414.53, and you’ll save $1,702.69 in interest over the life of the loan by refinancing.

There are a few situations where refinancing makes the most sense.

Rates have gone down

If you got your loan when average rates were high and they’ve since come down, it’s wise to look into refinancing. Unfortunately, auto loan rates steadily increased throughout 2023. Our experts forecast rates will cool off slightly for good-credit borrowers but generally remain elevated through 2024.

The rates to refinance tend to track with used vehicle rates, which are currently in the double digits.

You may still find better rates by getting a loan with a shorter repayment term. Lenders tend to offer lower rates the shorter your term is.

Your credit score has improved

Even if market rates haven’t changed drastically, improving your credit score may be enough to get a lower rate. You may qualify for better loan terms that will reduce your monthly and overall costs. A borrower with a better credit score can secure more competitive rates. Here are average rates for each credit score range, according to Experian’s third-quarter 2023 data.

Personal FICO score Average interest rate for used car loans
781 to 850 7.43%
661 to 780 9.33%
601 to 660 13.53%
501 to 600 18.39%
300 to 500 21.18%

You received your initial loan from the dealer

Dealers tend to charge higher rates than banks and credit unions to make a profit. If you took out your initial loan through dealer-arranged financing, refinancing with a different lender could get you a lower rate.

You need lower monthly payments

In some cases, refinancing a car loan can get you a more affordable car payment even without a lower interest rate. If you need to reduce your car payment, you could refinance your loan to a longer repayment term.

Expect to pay more in interest because you are extending the loan.

Auto Car
Bankrate tip
To secure the lowest rate possible, comparing rates with multiple lenders is important. Start searching with financial institutions where you already have an account, as you may get lower rates.

When refinancing doesn’t make sense

Refinancing a car loan isn’t always the right choice. Consider the following circumstances when securing a new loan may not be the best move.

You’re close to paying off your loan

If you are nearing the end of your loan term, then the refinancing process may not save you money. Instead, you should stick with it unless you desperately need to extend your loan term to reduce your monthly payment.

In most instances, you’ll also need to have made at least six payments on the loan and have at least six months remaining on the loan term to refinance. Lenders also have minimum and maximum balance thresholds to be eligible for refinancing. The minimum typically falls between $3,000 and $7,500.

You owe more than the car is worth

The further you are in the loan, the more likely you owe more on the car than it is worth — a scenario most lenders will not approve. This is also called being “underwater” or upside down. It will make it hard to refinance.

Interest rates are high

You may pay more by refinancing in the current market environment. The Federal Reserve has been working to control inflation by increasing the Federal Funds rate. This drives interest rate increases on everything from credit cards to car loans.

As of late 2023, the average used car rate was 11.35 percent, according to Experian data.

Your car doesn’t meet lender requirements

Lenders determine eligibility differently. Before you refinance, check the requirements for you, your vehicle and your current loan. Most lenders will require:

  • A regular source of income, a low debt-to-income ratio and good credit
  • Proof of residence, such as a lease agreement, mortgage statement or utility bill
  • Your car’s make, model, year, vehicle identification number (VIN) and mileage to evaluate your car’s worth
  • Your loan’s current balance, monthly payment and payoff amount to determine if you meet its minimum loan requirements

Finally, the car should be no more than 10 years old, though some lenders limit the maximum age to eight. The mileage should not exceed 100,000 or 150,000, depending on the lender. Refinancing with an unsecured auto loan may get you around these restrictions, but it may be harder to find lower rates.

Fees will outweigh your savings

Before refinancing, consider whether fees will impact your overall savings. Some auto loans have a prepayment penalty in place. Paying off your loan early can cost you more than you would save by reducing the interest rate.

Some lenders also charge a substantial origination fee when you take out a loan to refinance. It can eat into your potential savings and make refinancing more of a hassle than just sticking with your current lender.

Both your old and new lender may charge transaction fees, covering administrative or processing costs for terminating the old loan and starting the new loan agreement. You may be able to negotiate these fees. Some states will charge you state registration and title transfer fees for re-registering your car following refinancing.

The bottom line

The best reason for refinancing is if you qualify for a lower rate and will save money in the long run. Consider how long you have on a loan before proceeding with a refinance. Your savings may not be significant if you’re too far into the loan.

If refinancing is too expensive, you still have options. You could be better off requesting a car loan modification with your lender.