Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Reviewed by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Mar 28, 2022

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Just the Basics

  • Refinancing an auto loan entails replacing a current loan with a new loan that offers more favorable rates and/or terms
  • Refinancing offers several cost-saving benefits, the biggest of which is lower interest rates
  • If refinancing makes sense for your situation, you can start the process by checking your credit score

If you took out an auto loan and are now looking for ways to reduce your financial obligations, you may wonder, can you refinance a car loan? Refinancing a car loan involves taking out a new loan to replace the existing one, typically with a new lender. Just as it did with the previous lender, your car would serve as collateral until you pay off the loan in full.

Most people refinance their auto loans to get lower interest rates and save money. The process frees up cash for other bills.

Even if you cannot score a lower rate, refinancing may reduce your monthly payments by extending the repayment period. This may help if you are strapped for cash each month and need a bit of wiggle room. If you’re not sure if refinancing makes sense for you, use the information in the following guide to make an informed decision.

Benefits of Refinancing Your Auto Loan

When you refinance an auto loan, you receive a few distinct benefits. The top benefits of refinancing are as follows.

Score Lower Interest Rates

The number one reason people refinance their auto loans is to score lower interest rates. You may get a better rate if your credit has improved considerably since you first purchased your vehicle. The same is true if market rates are better now than back then.

Pay Off Your Debt Sooner

If you have the money to increase your monthly payments, you may consider refinancing to pay off your debt sooner. Shorter terms typically come with lower interest rates, which means that even though your monthly payments may be higher, you will ultimately pay less in the long run.

Get Lower Monthly Payments

On the flip side, you may choose to elongate the terms of your loan. If you struggle to pay the full amount each month, extending the life of your loan can score you a lower payment over a longer term. However, beware that your interest rates may go up and, regardless of if they do or not, you may end up paying more over the life of the loan.

Receive Cash From Your Equity

Some auto lenders offer cash-out refinance loans. With this type of loan, you may be able to refinance the original loan and receive some cash to put toward other expenses. This option may only be available if you have considerable equity in your vehicle.

If any of these benefits sound appealing to you, consider whether refinancing makes financial sense in the short and long term.

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Should you refinance your car loan?

In many cases, the question isn’t, “Can you refinance a car loan,” but rather, “How soon can you refinance a car loan?” Below are a few factors to consider to help you decide if refinancing makes sense for you right now.

Have interest rates dropped since you took out your loan?

Interest rates fluctuate regularly, so there is a strong possibility that they have fallen since you took out your original loan. If you can lock in a rate that is even just two to three percentage points lower than your rates now, you can save thousands of dollars over the life of your loan.

As an example, consider how much you can save by scoring a rate that is 1% lower than your rate now. If you took out an auto loan for $36,000 at 7% interest for 60 months, you would pay a total of $42,771. However, if you refinance for a point lower, you will end up paying $41,759 for a savings of $1,102. If you shorten the life of that same loan, you can save an additional almost $1,500.

Has your credit score improved since you took out the original loan?

If interest rates haven’t changed much since you took out your loan but your credit score has, you can still score a better rate by refinancing. For fair to poor credit, the average APR on a used vehicle is between 9.08% and 19.87%. A good to excellent credit rating can get you a rate of between 5.38% and 3.61%. If you had less than stellar credit when you first took out the loan, it may make sense to refinance now that you’ve built it back up.

Do you need access to more capital right now?

If you need to free up funds either by lowering your monthly payments or obtaining a cash-out refinance loan, refinancing may help.

Is your loan almost paid off?

If you have already almost paid off your loan in full, refinancing may make little sense. The longer you wait to refinance, the less you will save by doing so.

Will refinancing hurt your future goals?

When you refinance, you essentially obtain a new loan. If you hope to buy a home or other large asset in the near future, obtaining a new loan — even if for financial purposes — may get in the way of your goals. Waiting a couple more months will not minimize the benefits of refinancing, so hold until you’ve accomplished your goals before going through with the process.

How To Refinance a Car Loan

Refinancing an auto loan entails taking many of the same steps you took to obtain the original loan. That includes doing the following:

  • Checking and improving your credit score
  • Gathering income documentation
  • Researching lenders
  • Comparing loan offers
  • Applying for the new loan
  • Finalizing the contract

If your credit score has improved, and/or if you can show that you make timely payments on your current loan, you should have little trouble refinancing your auto loan.

Other Ways To Save Outside of Refinancing Your Auto Loan

If you decide refinancing is not for you, know that there are other ways you can save money on your monthly expenses, like reducing the cost of car insurance rates. When you shop around, you can save nearly $1,000 annually on auto insurance rates, which adds up to significantly more savings than what you can score with a refinance. If you combine refinancing with newer, cheaper car insurance, you stand to save thousands.