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What is auto loan refinancing?

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Auto loan refinancing can be a great way to save money while holding onto your vehicle, but it’s important to understand the process and compare rates before applying. If you have good credit, refinancing is an especially good option. And, if you currently have a poor interest rate due to financing with a dealership, you can also benefit from improved rates even without excellent credit.

What is auto refinancing?

Auto loan refinancing is the process of taking out a new auto loan to pay off an existing auto loan. This can help you reduce interest rates, lower your monthly payments or do both — depending on what you qualify for.

When is it a good idea to refinance your auto loan?

Refinancing your auto loan is a good idea if you can get approved for more competitive rates through a new loan. If your credit score has improved since you took out your current loan, it is likely that you could save money each month.

But it is important to consider where you are in the lifetime of the loan. If you only have a few months left or your credit score is the same as when you first applied for your current car loan, it may not help much.

You can prequalify with lenders to see if you qualify for a lower rate or shorter term. An auto loan refinance calculator can also help you tell whether refinancing will save you money.

How to save money with your auto loan refinance

There are a few ways that you can get more money back in your pocket when you refinance your auto loan.

Lower your interest rate

Refinancing your car loan could add cash to your monthly budget. Depending on your credit score and loan details, you could see a lower interest rate with a new lender. This could save you money over the life of the loan.

Lower your monthly payments

Depending on the current terms of your loan and the details of the new loan, you may see an overall drop in your monthly payments. Extending the term will do this, but just extending the term will also increase the overall cost, because you will be paying more interest.

But keeping the term the same — or shortening it — and getting a better interest rate will lower both your monthly payments and your overall interest paid.

How to refinance your car loan

Understanding the process of auto loan refinancing is just as important as knowing the benefits. Here are four steps to follow when refinancing a car loan.

1. Check your credit score and report

Before refinancing a car loan, you’ll need to check your credit score and report to ensure that your information is accurate and up to date. If your credit score is over 670, you’re likely to get a lower interest rate. Alternatively, if you have a lower score, it may be difficult to get a better interest rate.

2. Compare rates and shop around

Once you know your credit score, compare auto loan rates from several lenders. In order to know you’re getting the best rate possible, prequalify with several lenders before submitting a full application. This will also save you from taking multiple hits to your credit score.

3. Apply and get the auto refinance loan

After you’ve found the best rate, you can complete the application online, over the phone or in person — depending on the lender. Be sure to review all of the terms before signing.

4. Pay off your current loan

You will either receive a check or the new lender will pay off your existing one. Continue making payments on your existing loan until you have verified it is completely paid off.

The bottom line

Refinancing your auto loan can save you money if you are paying a higher rate than the current market. But only do it if it will save you money. If you need to lower your monthly payments, but it would require extending your loan term, you may want to look into other options.

Learn more

Written by
Bankrate
This article was generated using automation technology and thoroughly edited and fact-checked by an editor on our editorial staff.
Edited by
Auto loans editor