How to Refinance a Car Loan

Refinancing a car loan involves knowing your current credit score, reviewing your existing contract, determining the value of your car, applying for a new loan, and comparing interest rates. You're essentially taking out a new loan, with a smaller balance and better interest rates. That's the gist of it, but there is a lot more you need to know, which is what we'll cover in this article. 

If you've purchased a car in the last few years, you've most likely noticed that interest rates have been stubbornly high. While the Fed raised rates primarily to combat inflation, consumers who have taken out large loans, due to the inflated pricing of the pandemic vehicle shortage or because of negative equity, were burdened by these higher rates. Refinancing a car loan is the best way to reduce that interest rate and bring down your monthly payments. So many people are jumping on this strategy now that the volume of dollars being refinanced has increased 11% from the first quarter of 2025 and 29% from the second quarter of 2020, according to Experian Automotive's State of the Automotive Finance Market report.

In August 2025, the average interest rate for a new car loan was 7% and 10.7% for a used car, according to Edmunds sales data. Given that these are averages, there's a good chance that many people saw far higher rates. If your credit has improved since you purchased your car (or if interest rates have dropped), refinancing your car loan could reduce your monthly payment and save you thousands of dollars in the long run. With that in mind, here is our guide on refinancing and how it can save you money.  

Steps to refinance a car loan

1. Check your credit
2. Know the details of your current loan 
3. Know your car's current value
4. Get your documents ready and get preapproved for loans
5. Compare APRs and apply for refinancing

Jump to: How refinancing your car loan can save you money

1. Check your credit 

Checking your credit score is the most important step and should determine whether you should proceed with a loan refinance. 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.

1A: How to refinance a car loan with bad credit:
If your credit hasn't improved much or has stayed the same, refinancing can still be worth looking into. It is important to set realistic expectations, 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.

2. Know the details of your current car loan

Car owners who are thinking about refinancing their auto loans should 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. Tracking down this info 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. A prepayment penalty 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.

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 long term.

3. Know your car's current 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. Get your documents ready and get preapproved 

Most banks, credit unions or online lenders offer auto loan 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.

You'll need the following items when applying for a car loan or refinance: 

• The car's vehicle identification number (VIN)
• The car's current registration
• Proof of car insurance
• Your ID or driver's license
• Proof of employment or pay stubs from a current employer
• Social Security card or number

5. Compare APRs and apply for refinancing

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. As we mentioned earlier, credit unions tend to have the best interest rates, so don't overlook them in your search. 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.

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.

How refinancing your car loan can save you money

Experian also points out that the average monthly savings from a refinanced car loan can range from $53 to $82, depending on your credit tier, with credit unions offering the greatest potential savings. Here's a more detailed example of how refinancing can save you money.

Let's say you bought a $26,000 used car two years ago, and your credit had a few dings at the time. Used cars typically have higher interest rates, and with a middle-of-the-road credit tier, a 15% interest rate is fairly common. Pair this with a also common 72-month loan term. Once you factor in the interest rate over time and sales tax (we're using 9.5% from California), this translates to a total loan cost of about $43,344, with a monthly payment of about $602. The total interest paid on this loan would be about $14,874, over the course of six years.

But time has passed, and while interest rates have remained relatively high, you've been making all your payments on time, and your credit situation has improved. This makes you a good candidate for refinancing. You've gone up a tier in credit and now qualify for a 10% rate and take out a new loan for the remaining balance of the car ($21,631).

The new loan for the remaining 48 months will lower your payments to about $549. A savings of $53 per month may not sound like much, but the refinancing reduces the overall finance charges by $2,563 over the remainder of the loan.

Other examples could be even more dramatic. In some cases, an uninformed used-car buyer might be saddled with a car loan that has upward of 20% interest. It might sound ludicrous, but bad credit, combined with negative equity, can lead to a rate this high. By refinancing at a competitive rate, this buyer could see potential savings of hundreds of dollars a month.

Final tip 

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.

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.