Refinancing auto loans: what is it?
Refinancing auto loans: what is it?

Auto loan refinancing can be a great way to save money while keeping 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 your first borrowing — refinancing is a good option. If you currently have poor interest rates due to auto dealer financing, you can benefit from increased interest rates even without an excellent credit rating.

What is auto refinancing?

Auto loan refinancing involves taking out a new car loan to pay off an existing car loan. It can help you lower your interest rates, lower your monthly payments and pay off your debt faster – depending on your eligibility.

When does it make sense to refinance your car loan?

Refinancing your car loan is a good idea if you can get a more competitive rate on a new loan. If your credit score improves after you take out your current loan, you may be able to save money each month.

However, it is important to consider where you are within the term of the loan. This may not help if you only have a few months left, or if your credit score is the same as when you first applied for your current car loan.


If you’ve refinanced your car loan one or more times in the past, you may not be eligible for more competitive terms.

You can prequalify with your lender to see if you qualify for a lower interest rate or shorter term. Auto loan refinancing calculators can also help you determine whether refinancing will save you money.

What’s stopping you from refinancing your car loan?

Certain circumstances may prevent you from refinancing your car loan, or mean it may not be the best option. You may need to wait if:

Your car has more than 100,000 miles or the vehicle is more than 10 years old.
Your car loan is upside-down and ineligible for refinancing.
If the loan is repaid early, a prepayment penalty will apply.
You’ve almost paid off your loan, and refinancing means paying more interest.
Your credit score is too low to qualify, or you can get a higher rate if you refinance.

How to save money on auto loan refinancing

When you refinance your car loan, there are several ways to get more money out of your pocket.

Lower your interest rate

Depending on your credit history and loan details, you may see lower interest rates from new lenders. A lower APR may save you money over the life of the loan.

Lower your monthly payment

Depending on your current loan terms and the details of your new loan, your monthly arrears may decrease. Extending the term will do this, but simply extending the term will also increase the overall cost of the loan because you pay more in interest.


However, if you keep the term the same (or shorten it) and get a better rate, both your monthly payments and the total interest you pay will go down.

How to Refinance Your Auto Loan

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

1. Check your credit score and sign up

Before refinancing your car loan, you must review your credit history and reports to make sure your information is accurate and up-to-date.

If your credit score is above 670, you may get a lower interest rate — especially if you took out a loan with a low credit score. A low score will make it difficult to get a good rate.


For borrowers with a credit score between 661 and 780, the average APR for new and used car loans was 4.03% and 5.53%, respectively. However, if your score is between 601 and 660, these rates increase to 6.57% and 10.33%.

2. Compare prices and shop around

Once you know your credit score, you can compare car loan rates from multiple lenders. To make sure you get the best rate possible, prequalify with multiple lenders before submitting your full application. This will also protect your balance from multiple blows.

3. Apply for and get a car refinance loan

Once you’ve found the best rate, you can complete your application online, over the phone or in person – depending on the lender. Be sure to read all terms before signing.

4. Pay off your current loan

You either get a check, or a new lender pays your existing check. Continue to pay your existing loan until you confirm that it has been repaid in full.

Final result

Refinancing your car loan can save you money by paying a higher rate than the current market rate. But only refinance if it will save you money. If lowering your monthly repayments through refinancing requires extending your loan term, you may want to consider other options.

So learn more:

Jake Smith

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Jake Smith

He is the editor of Eragoncred. Previously, he was editor-in-chief of Eragoncred and a financial industry reporter. Jake has spent most of his career as a Digital Media journalist and has over 10 years of experience as a writer and editor.