How to Refinance a Car Loan

Interest rates have been stubbornly high for the last few years since the Covid-19 pandemic. While the Fed raised rates primarily to combat inflation, consumers who have taken out large loans — such as those for a house or, for our purposes, a car — were burdened by these higher rates. If you took out a loan on a car between May 2022 through 2024, you were likely subjected to the peak of rising interest rates. Refinancing a car loan is the best way to reduce that interest rate and bring down your monthly payments. With that in mind, here is our guide on refinancing and how it can save you money.

In June 2024, the average interest rate for a new car loan was 7.3% and 11.5% for used cars, according to Edmunds sales data. Assuming your credit was around the U.S. average and you took out a loan on a car over the last few years, you were likely subjected to these high rates of interest. A few dings on your credit report mean your rate was likely even higher. If your credit has improved since then or if interest rates have dropped, refinancing your car loan could save you thousands of dollars in the long run.

We'll include an example of how refinancing can save you some coin, but if you want to skip straight to how to get started, click here: How to refinance a car loan.

How refinancing your car loan can save you money

Let's say you bought a new car two years ago, and your credit had a few dings. You might have been charged 9% on a common 72-month loan for a hypothetical $35,000 car. This translates to a financed loan of about $38,625, with monthly payments of roughly $696 per month, based on California sales tax and registration. The total interest paid on this loan would be about $11,504.

But time has passed, and while interest rates have gone up, you've been making all your payments on time, and your credit has improved. This makes you a good candidate for refinancing. You now qualify for a 6% rate and take out a new loan for the remaining balance of the car ($27,978).

The new loan for the remaining 48 months will lower your payments to about $657. A savings of $39 per month may not sound like much, but the refinancing reduces the overall finance charges by $1,880 over the course of the loan.

Other examples could be even more dramatic. In some cases, an uninformed used-car buyer might have saddled himself with a car loan that has 18% interest. It might sound ludicrous, but some purchases can lead to a rate this high. By refinancing at a competitive rate, this buyer could slash the monthly payments in half.

Steps to refinance a car loan

1. Get your documents ready: Car owners who are thinking about refinancing their auto loans should first locate their purchase contracts and check the length of the loan (the term), the balance (how much they still owe), and the current interest rate. You can also find this information online on the lender's website. This is especially easy for car owners who have their accounts online, but if you pay by mail, you can simply call your lender to find out all of this information — just be sure to have your account details handy when you call.

This is also the point where you need to determine if your lender has a prepayment penalty, which is a fee a lender sometimes charges if you pay off a loan sooner than the loan term. If so, this fee may eat into the potential savings, and the refinance may not be worth it.

2. Get a payoff quote: Next, you'll need to find out what your loan's payoff quote is. That is the number you'll have to pay to settle the loan in full with your current lender. Keep in mind that the amount you owe on the loan and the payoff quote are not always the same — the payoff can be lower. Keep that payoff quote in mind because that's how much you'll want to borrow from the next lender. Financing that amount from another lender with a lower interest rate is how you'll save yourself money in the longer term.

3. Know your car's value: A key part of this process is making sure that you aren't upside down on your car loan. If you end up owing more on your loan than your car is worth, refinancing will be difficult because the bank may not approve the loan. An easy way to find out how much your car is worth is by checking the Edmunds appraisal tool. If you do find yourself in this situation, be sure to start making on-time payments that are more than the minimum. Even if it's a little bit at a time, catching up on your loan and ensuring you owe no more than your car's worth is an important piece of this process.

4. Check your credit: Once you're sure you owe less than your car's current value, the next step is to check your credit. Many banks and credit card companies offer tools that allow members to check their credit reports and scores online for free. Another free resource is AnnualCreditReport.com. If your credit has improved since you last ran it, you're in a good position to refinance.

4a: How to refinance a car loan with bad credit:
If your credit hasn't improved much or has stayed the same, refinancing is still worth looking into. It is important to set realistic expectations, however, as you may not necessarily get a better rate. Follow the steps below to apply for refinancing, but pay extra attention to whether the application makes a soft inquiry so that it does not further impact your credit.

If the rates you qualify for aren't an improvement, you'll likely need to wait a while longer until your credit improves. Take that extra time to pay off other balances and make your payments on time to raise your credit score.

5. Compare APRs and apply for refinancing: Many lenders offer auto refinancing. Start by checking the refinancing rates offered by your own bank or credit union. While you're shopping, try to find a company that uses a soft credit pull to give you approval. (Unlike a hard credit pull, a soft pull will not affect your credit score.) Even if you're approved for a lower rate than you currently have, don't immediately jump on it.

Compare your results to rates listed for online lenders and other banks on a site such as Capital One. Be sure you check with at least two to three lenders to make sure you get the lowest rate possible. You do not have to refinance with the same institution that's currently financing your car. Be sure to review the length of the loans since different terms have different rates. Shorter loans typically come with lower interest rates, but you'll have to pay more money toward the principal of the loan (the amount you're borrowing) every month.

Pro tip: The key to making the refinance work is to take out the new loan for the same period of time remaining on the original loan. It may seem tempting to add an extra year to the new loan, to drop the monthly payment even more. But you will not only be paying off the loan for longer than before, it will also cut into the total savings by roughly half.

There's more to car loans than just interest rates, though. You should also keep an eye out for loan processing fees that could cut into the savings of the new loan.

If you think you got into a situation where you're unhappy with your car purchase for another reason (perhaps the dealership added a warranty you think you don't need and you want it canceled), check out our guide on how to get out of a bad car loan here.

Remember, as federal interest rates drop, auto loan rates follow. Why throw that money away by paying unnecessary interest? Visit the Edmunds auto loan calculator to see how much getting a new loan at a lower interest rate could save you.