Car Buying
How to Refinance a Car Loan
To refinance a car loan means replacing your current loan with a new one, ideally at a lower rate, and it makes the most sense when your credit has improved or rates have dropped since you first financed.
When you should refinance a car loan
- Your credit score has improved meaningfully since your original loan.
- Market interest rates have dropped since you financed.
- You originally financed through the dealership at a marked-up rate.
- You want to lower your monthly payment (though extending the term to do this can increase total interest, weigh both effects).
When it usually does not help to refinance a car loan
If your car is worth less than you owe (you are “underwater”), refinancing can be difficult or require paying down the gap first. Refinancing very late in a loan’s term also has limited benefit, since most of the interest in a standard amortized loan is paid in the earlier months.
Tip: use the Auto Loan Calculator to compare your current remaining balance and rate against a prospective refinance offer before committing, focus on total interest remaining, not just the new monthly payment.
How to refinance a car loan, step by step
- Check your current loan’s payoff amount and confirm there is no prepayment penalty.
- Check your current credit score to gauge what rate you might now qualify for.
- Get quotes from at least two or three lenders, banks, credit unions, and online lenders all compete in this space, and the Consumer Financial Protection Bureau’s auto loan tools can help you compare what you are offered.
- Compare the new loan’s total cost (rate x remaining term) against simply continuing your current loan.
- If it is a clear improvement, the new lender typically pays off your old loan directly as part of the process.
Avoid resetting the clock unnecessarily
Refinancing into a brand-new, longer term can lower your monthly payment while quietly increasing total interest paid and extending how long you are financially tied to a depreciating vehicle. Where possible, refinance into a term that ends around the same time your original loan would have.
Documentation to gather, and how the lien transfer actually works
Gather the vehicle’s VIN and mileage, proof of income and residence, current registration and proof of insurance, and your existing lender’s account and payoff information. Once your new lender pays off the old loan, the original lienholder has to formally release its lien, and the new lender then records its own lien on the title, a process that can take anywhere from a few days to a few weeks depending on your state’s paper or electronic title system. Until that paperwork fully clears, you may be making payments to your new lender on a title that technically still shows the old one, which is normal.
Cash-out refinancing and other risks to watch for
Some lenders advertise auto refinancing that lets you borrow more than you currently owe, pocketing the difference in cash. This increases your loan balance against a depreciating asset, the opposite of the direction most borrowers should be moving, and should be treated as a last resort rather than a convenient way to access cash. Also confirm whether GAP insurance or an extended warranty tied to the old loan transfers, some GAP policies are voided entirely when the original loan is paid off early, and ask the new lender how they handle a payment that lands during the payoff-and-funding transition.
Refinancing to remove or add a co-signer
Most auto lenders do not offer a simple way to release a co-signer from an existing loan; refinancing into a new loan is generally the cleanest path when circumstances have changed, someone who needed a co-signer originally may have since built enough credit to qualify solo, or a divorce may require untangling a jointly held loan. To drop a co-signer, the remaining borrower needs to qualify for the new loan alone, based on their own income, credit, and the vehicle’s value relative to the payoff amount.
Once the refinance closes, the original account should update on both people’s credit reports as closed and paid, but this does not always happen immediately, so the original co-signer should check their own credit report a billing cycle or two later to confirm it. The reverse also comes up, adding a qualified co-signer specifically to refinance into a better rate, which works well but gives that co-signer full legal responsibility for the new loan, identical to co-signing from the start.
Does it hurt my credit score to refinance a car loan?
Applying triggers a hard inquiry, which causes a small, temporary dip, but making on-time payments on the new loan helps your score over time, similar to any other installment loan.
Can I refinance a car loan if I am upside down on it?
It is harder but sometimes possible, some lenders allow rolling a modest negative equity amount into the new loan, though this increases your total balance and should be approached cautiously.
Is there a minimum time before I can refinance a car loan?
There is no universal rule, but many lenders prefer the original loan to be at least a few months old, and refinancing is most beneficial when done well before the loan’s final year.
Will my GAP insurance or extended warranty carry over when I refinance?
Not automatically. Some GAP policies are sold specifically tied to the original loan and terminate when that loan is paid off, even via a refinance rather than a sale. Contact your GAP and warranty providers before refinancing to confirm whether coverage continues or needs to be repurchased.
If I add a co-signer when refinancing, do they take on the same responsibility as if they had co-signed the original loan?
Yes. A co-signer added during a refinance has identical legal responsibility for the new loan as a co-signer on an original loan, including equal impact to their credit report and liability if payments are missed.