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 — especially if your credit has improved since you first took out the loan — refinancing is a 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 taking out a new auto loan to pay off an existing auto loan. It can help you reduce interest rates, lower your monthly payments and pay off the debt quicker — 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, you likely can save money each month.

But it is important to consider where you are in the loan’s lifetime. 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.

Also, if you’ve already refinanced your car loan once or a few times in the past, you may not qualify for more competitive terms.

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.

What might stop you from refinancing your auto loan?

Some circumstances can prevent you from refinancing an auto loan, or mean doing so may not be the best option. You may want to hold off if:

  • Your car’s mileage exceeds 100,000, or the vehicle is over 10 years of age.
  • You’re upside-down in your auto loan and can’t qualify for a refinance.
  • You’ll incur prepayment penalties for paying your loan off ahead of schedule.
  • You’re almost done paying off the loan, and refinancing means you’ll pay more in interest.
  • Your credit score is too low to qualify, or you’ll get a higher rate if you refinance.

How to save money with your auto loan refinance

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

Lower your interest rate

You could see a lower interest rate with a new lender depending on your credit score and loan details. A lower APR will likely save you money over the life of the loan.

Lower your monthly payments

Depending on your loan’s current terms and the new loan’s details, you may owe less each month. Extending the term will do this, but just extending the term will also increase the loan’s overall cost because you will pay more in interest.

But keeping the term the same — or shortening it — and getting a better interest rate will lower both your monthly payments and 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 may get a lower interest rate — especially if your score was lower when you took out the loan. A low score will make it difficult to get a great interest rate.

The average APR for new and used car loans is 5.82 percent and 7.83 percent, respectively, for borrowers with credit scores between 661 and 780. But if your score is between 601 and 660, these rates increase to 8.12 percent and 12.08 percent.

2. Compare rates and shop around

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

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

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

The bottom line

Refinancing your auto loan can help you save if you are paying a higher rate than the current market or if your credit has improved. But only refinance if it will save you money. If lowering your monthly payments through refinancing would require extending your loan term, you may want to look into other options.

FAQs about auto loan refinancing

  • To determine an auto loan interest rate, lenders will consider multiple factors. Some of the most common include:
    • Credit report scores. Lenders typically use credit report scores to determine your creditworthiness. The higher your credit score, the more likely you may be to get approved for a loan and get a more competitive rate, as lenders consider you more likely to repay the loan.
    • Down payment. If you put money down toward your vehicle, you’ll have more equity — meaning the loan amount is smaller. This can lead to a lower interest rate, as it lessens the risk to the lender.
    • Loan term. The longer the loan term, the lower your monthly payments will be — but this may also result in a higher interest rate.
    • Payment history. A lender may consider your payment history. If you have a history of late or missed payments, the lender may use this information when determining your interest rate.
  • Common fees associated with auto loan refinancing include:
    • Prepayment fee. A prepayment fee is a penalty associated with fixed-term loans that are paid off early.
    • Transaction Fee. Your current and new lenders may charge transaction fees when refinancing your current vehicle loan. Try asking to have it waived.
    • State registration fee. A state registration fee is a fee imposed by the state as a regulatory measure to recoup the cost of maintaining state roads. Some states may charge you to re-register after refinancing.
    • Title transfer fee. You’ll pay this fee when transferring the title of a car from one lender or owner to another. It can cost anywhere between $5 and $165 depending on the state and county where the vehicle is registered and other factors, such as the model year.