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Pros and Cons of Refinancing a Car

Pros and Cons of Refinancing a Car
Sheryl Nance-Nash
Sheryl Nance-NashUpdated December 4, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
When it comes to thinking about refinancing, you likely think about your mortgage. What may not typically spring to mind for many people is refinancing their car loan, but it may be an idea worth exploring.When you refinance an auto loan, you pay off your old car loan with a new one, often from a new lender. The new loan may have better interest rates or a loan term that lets you lower your monthly payments.But, as with all things financial, it’s a good idea to weigh the advantages and disadvantages of any car refinance you’re thinking about making. Below we highlight pros and cons of refinancing a car.

The Pros of Refinancing a Car Loan

Learn how to refinance auto loans — if you decide to go in that direction. Here are some of the potential benefits:

Lower Interest Rate and/or Monthly Payments

Refinancing to a loan with more favorable terms can be a path to lowering your interest rate and/or monthly payment amount. You don’t want to make any assumptions about savings, so it’s a good idea to use an auto loan refinance calculator to see whether you’ll save money overall.

Different Loan Terms

Another major plus is the opportunity to change your loan term (the time period over which you’ll be paying back the loan). Ideally, you should try to keep the term as short as you can so that you will be paying the least interest over the life of the loan. However, you’ll also want to consider your monthly budget. If extending your loan term and reducing your monthly payment helps you stay on top of your bills, adding more time may be worth it.  

You Can Afford to Pay More

Knowing when to refinance a car is critical. Auto refinancing can be beneficial if you can afford to be paying more per month and could therefore try to get a shorter loan term.

You Could Get Better Terms

A loan repayment term is an agreed-upon amount of time in which you make monthly payments toward a loan. Car loan terms are typically in 12-month increments, such as 24, 36, 48, 60, 72, and 84 months. Shorter terms often mean higher monthly payments. When refinancing a car, you can refinance for a term that’s right for you.

You Can’t Keep Up With the Bills

If you refinance for a loan with longer terms, it usually means your monthly payments will be lowered. So you can get relief from a debt you may be struggling with. (You may pay more interest over the life of the loan if you refinance with an extended term.)

Frees Up Money to Pay Down Debt

One of the benefits of refinancing a car is it may give you a lower monthly payment. Refinancing for a lower monthly payment can help free up your budget to pay down other debts using the avalanche method.

A Source of Extra Cash

In some cases, you could borrow extra money through a refinance. If your car is worth more than you owe on your current loan, you might be eligible for a cash-out refinance loan. This helps you refinance your car loan and borrow extra money based on your equity in the car. That’s cash you can use to pay down higher interest debt or stash in your emergency fund.

You Can Pay Your Loan off Earlier

Refinancing a car pays off your existing car loan early with new financing. If you feel trapped in an unfavorable car loan, refinancing can pay off your existing car loan early with new terms that are right for you. Auto refinancing may be worth exploring if your existing loan doesn’t have a prepayment penalty (more on that below).

The Cons of Refinancing a Car Loan

For all the pluses of refinancing, it’s got downsides, too. 

Finding a Lender Can Be Tough

Will you be attractive to a lender? You may not be if one or more of the following apply:
  • Your vehicle is more than 10 years old
  • You owe less than $7,500 on your current loan
  • You owe more than $100,000 on your current loan
  • Your car has more than 100,000 miles on it
  • You drive for Lyft or Uber as your primary source of income or otherwise use your car for commercial purposes

Prepayment Penalties and Fees

Read the fine print of your existing loan contract. Does your current loan charge penalties for paying off your loan early?  Many lenders don’t, but if yours does, you’ll likely want to calculate whether those fees will cost you more than you’d save with a new loan. Plus, there could be fees charged by your new loan company, too.If it costs too much to switch your car loan to a new lender, the cost to refinance a car may cancel out the benefits, and you might be better off staying with your original loan.

Temporary Credit Score Dip

Does refinancing a car hurt your credit? Yes, refinancing an auto loan typically lowers your credit score temporarily. This is in part due to the fact that it usually requires a hard pull credit check and also to the fact that you are replacing an older loan with a newer one. The dip could take two years to go away.

There’s a Risk of the Loan Becoming Upside-Down

Auto refinancing doesn’t eliminate your debt — it simply pays off your existing auto loan with new financing. Refinancing for an extended term can increase your borrowing costs and carry the risk of falling financially underwater as your car depreciates in value. Having an upside-down car loan means your car is worth less than the remaining amount you owe on the loan. You might also hear this called being underwater on the loan.Recommended: Guide to Car Depreciation

4 Tips When You’re Refinancing an Auto Loan

1. Don’t be in a hurry as you shop around for a loan

Dig deep when looking for lenders and include online auto loan lenders in your search. Avoid any lender or company that charges a fee to refinance your loan — that cost could erase any savings from the new loan. And as you assess lenders, remember it’s not only fees that are worth looking at, but also what kind of interest rates they offer and customer service. 

2. Consider applying for prequalification

Prequalifying for auto refinancing can give you a sense of what type of offers you might be able to snag. What’s involved? For starters, the lender will look at your credit and the type of vehicle you own. Typically, prequalification is a soft credit inquiry, so it won’t hurt your credit score. And while prequalification is not a guarantee, it's a good indicator of what you can expect in terms of loan approval.

3. Remember the loan-related details

If you purchased a GAP waiver policy (which pays the difference between what you owe on your car and what it’s worth at the time of an accident) with your original loan, it will not automatically carry over into a new loan. If you still want GAP coverage, explore your options for a new policy with your new loan.Recommended: The 11 Most Expensive Car Repairs

4. Plan your timing

Be mindful too, if in the not-too-distant future you will begin shopping for a home. You might want to delay going for a car refinance if you’re seeking the best rates and terms for a mortgage loan. If you’re wondering what to ask when refinancing, one of the biggest questions is whether it will impact your credit score. As mentioned earlier, auto refinancing can cause your credit score to dip because it typically involves a hard inquiry while adding a new account to your credit report.

Will Refinancing Impact My Credit Score?

As mentioned above, auto refinancing can impact your credit scores. For one thing, refinancing typically requires a hard inquiry into your credit report. This means your credit score may drop several points when you apply with your lender.That’s generally nothing to panic about, but it’s a good idea to be mindful of it. While you want to shop around for your loan, actually submitting multiple applications can ding your credit score down. However, timing is everything. If you submit all your applications within a 14 to 45 day window, the impact to your credit score should be the same as if you’d only submitted one application. That’s because credit score compilers understand that you may be “rate shopping.”

When Is It Worth Refinancing a Car?

When or whether to refinance is not always black and white. Much depends on your circumstances and your goals.
  • Refinancing could make sense if you lost your job, or a spouse is working less and you need to cut your monthly budget.
  • A refinance might be a good idea if you can qualify for a better interest rate or better terms than you got on your old loan.
  • Refinancing might also align with your goals. For example, if you’re on a mission to pay down debt, applying the monthly savings from refinancing can help you get there.

Can You Refinance With Bad Credit?

If your credit is bad, you may be turned down. And if you are offered a loan, you may not qualify for advantageous interest rates if you are trying to refinance with bad credit.

When Is It a Good Time To Refinance?

Here are some circumstances on when it might be a good time for you to refinance a car:

Credit Score Is Satisfactory

If you have good-to-excellent credit or fair credit scores trending upward, that might be a good time to check your rates for auto refinancing. Lenders typically offer their best rates to borrowers with excellent credit.

Auto Rates Have Gone Down

If car loan rates have gone down, that may be a good time to explore your auto refinancing options. Monetary policy decisions by the Federal Reserve — particularly decisions involving the federal funds rate — can influence the rate environment for consumer loans.

When Is It a Bad Time to Refinance?

Here are some circumstances on when it might  be a bad time for you to refinance a car:

If You’re Already Upside-Down

Auto refinancing may not be right for you if the outstanding balance on your existing car loan is greater than the resale value of your vehicle. Some lenders may be unwilling to refinance an upside-down car loan, and some lenders may require you to bolster your equity in the vehicle as an auto loan refinance condition.

Interest Rates Continue to Rise

As mentioned earlier, the Fed’s monetary policy decisions concerning the federal funds rate can influence the rate environment for consumer loans. The cost of borrowing typically goes up if the Fed raises its benchmark rate. Auto refinancing may not be right for you if you’re unable to refinance for a lower interest rate.

If You’re Close to the End of Your Loan Term

Refinancing a car may not be right for you if you’re already near the end of your car loan term. You may pay more interest over the life of the loan if you refinance with an extended term. Refinancing may also require a hard inquiry into your credit report, which can cause your credit score to drop several points. Refinancing at that point may not be worth it.

Alternatives to Refinancing Your Auto Loan

Here are some alternatives you can consider if auto refinancing isn’t right for you:

The Takeaway

Refinancing a car can be a smart strategy — in some cases. Do the research to see if the numbers work out in your favor or whether you’re better off with your existing loan. If you’re considering refinancing your vehicle, Lantern by SoFi may be able to help. Fill out one simple form and learn about refinancing an auto loan so you can find the one that’s best for you.Lantern helps you compare auto loan refinance rates.

Frequently Asked Questions

What are the advantages of refinancing a car loan?
What are the disadvantages of refinancing a car loan?
Does refinancing a car require a hard inquiry?
Can you refinance your auto loan after just one year?
Photo credit: iStock/Dean Mitchell

About the Author

Sheryl Nance-Nash

Sheryl Nance-Nash

Sheryl Nance-Nash is a freelance writer specializing in personal finance, business, and travel. Her work has appeared in Money Magazine, Newsday, The New York Times, Business Insider,, AARP the Magazine,,, among others.
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