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What Questions Should You Ask When Refinancing a Car Loan?

What Questions Should You Ask When Refinancing a Car Loan?
Sheryl Nance-Nash
Sheryl Nance-NashUpdated April 8, 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.
Questions you may ask to determine whether car loan refinancing is right for you include the following: Do I qualify for car loan refinancing? Will refinancing impact my credit score? Is cash-out auto refinancing worth it? What will my new interest rate be? Refinancing a car may be right for you if you need a lower monthly payment on your car loan. Below we highlight nine questions to ask when refinancing your car loan:

1. Do I Qualify for Car Loan Refinancing?

There’s no guarantee that you’ll be approved for auto refinancing. It can be difficult to qualify for an auto refi loan if you have bad credit or a high-mileage car with over 100K miles on the odometer. Even if you have excellent credit, a lender may be unwilling to refinance your car loan if you owe less than $5,000 on your loan.Each lender has its own eligibility requirements and underwriting standards. Prequalifying for an auto refinance loan doesn’t guarantee loan approval, but it may help you determine whether refinancing is right for you.Recommended: Can You Refinance a Car Loan With Bad Credit?

2. Will Refinancing Impact My Credit Score?

Refinancing can hurt your credit score because it requires a hard credit inquiry. This means that when you apply for a refinancing loan, your credit score may for a time drop by as much as 10 points.And while you’ll likely want to shop around for the best loan terms, submitting multiple applications over several months can ding your credit score. However, timing is everything. If you submit all of your applications within a short window (typically 14 days or 45 days), the impact on your credit score should be the same as if you’d only submitted one application.Keep in mind that age of debt is a factor in your credit score. Taking on the refinancing debt increases your amount of newer debt, which may also temporarily ding your credit score.In the aftermath of acquiring your loan, much of what happens to your credit score depends on you. For example, if you use the savings from your lower monthly payments to pay off higher interest debt, reduce your credit utilization ratio on your credit cards, or pay off old collections accounts that drag down your score, these actions may help rebuild your credit record. And of course, If you pay your loan back in a timely fashion, that can work toward building a positive credit history, too.

3. Is Cash-Out Auto Refinancing Worth It?

Cash-out auto refinancing allows you to borrow against the available equity in your financed car. This can provide you with a lump sum of cash for covering personal expenses, but there are some potential downsides to cash-out refinancing. For one, it can increase your overall debt in terms of outstanding principal and total interest costs. Your personal preferences and circumstances may dictate whether cash-out auto refinancing is right for you.

4. What Will My New Payment Be?

There are several factors that may determine what your new monthly payment will be after refinancing a car. These include your interest rate, the length of the loan term, and the total loan amount. But each potential refi lender should let you know exactly what the payment would be so that you can compare it with your current monthly obligations and other refi loan offers.

5. What Will My New Interest Rate Be?

Ideally, your new interest rate will be lower than the one you’re paying now. If you can’t get a lower interest rate, refinancing will likely lose much of its appeal.The odds are in your favor if your credit score has improved since you got your first loan. If interest rates generally have dropped, too, you may also qualify for a better deal for you.On the flip side, if your credit score has dropped, you’re likely to face the consequences, meaning you won’t necessarily qualify for the best interest rates — or even the same one you got before. Also, if your car’s appraisal value has declined significantly, you’re likely to receive a higher interest rate.

6. How Long Will My New Loan Term Be?

Some borrowers may qualify for auto refinance loan terms up to 84 months. Creditworthy applicants may have the option to choose either a short or long term. A longer term may provide you with a lower monthly payment, but it could also increase your total interest costs over the life of the loan.Refinancing may not be right for you if it leads to an upside-down car loan. This describes a situation in which the outstanding balance on your auto refi loan is greater than the resale value of your refinanced car. Being underwater on a car loan is generally not an ideal situation.However, if you’re unable to afford your monthly payments, refinancing for a longer term may provide you with a lower monthly payment that you can afford. Refinancing for a longer term may be right for you if you need a lower monthly payment on your car.

7. How Soon Can I Refinance a Car Loan?

If you’ve recently bought a new car and don’t like your interest rate, you may refinance your car loan almost immediately. There are no time constraints on how long you have to wait after taking out a car loan to refinance it. You can apply for refinancing any time after you buy your car. Just bear in mind that realistically, it will probably take up to a month for a department of motor vehicles or DMV to process your paperwork.That said, there are certain particular times when you might consider refinancing. These may include when interest rates are significantly lower than what you’re currently paying or when your credit score is now higher than when you got your current loan (since you will likely be offered a more favorable interest rate this time).Recommended: How Soon Can You Refinance a Car Loan After Purchase?

8. What Fees Are Associated with Auto Refinancing?

There are usually some fees involved in refinancing. What they are exactly may vary by lender, your state of residence, or the state your refinancing lender is based in.Some fees are relatively standardized. Expect the standard transfer of lien holder fees and state re-registration fees (which can cost more than $200 in some cases).However, other fees may depend on your old and new lenders. They can include the following:
  • Prepayment penalties. Your existing lender might have prepayment fees. This is a penalty for paying off your loan early. Many lenders don’t charge these, but if yours does, calculate whether those fees will cost you more than you’d save with a new loan.
  • Application fees. Your new lender might charge you an application fee for filing the papers. Don’t be shy about asking the lender to waive the application fee. After all, it’s the honeymoon stage, so it might be generous.
  • Transaction fees. There could also be a “transaction” fee, administrative fee, or processing fee charged when you terminate your loan.

9. What Should I Be Aware of in the Fine Print?

You have to be a bit of a sleuth when you’re thinking about signing any sort of contract. You want to be on the lookout for disclosures and details about any and all fees. Do ascertain whether there are prepayment penalties for early payoff of the loan, for example.And be aware that your loan could include stuff you might have no interest in, like gap insurance, which could add more costs to your refinance. Take your time and go through the tiny type. It could save you money and costly misunderstandings.

The Takeaway

Refinancing your car loan can mean a positive difference to your finances if you get a lower interest rate and lower monthly payments. Asking questions can help you be sure you’re making your decision based on good information.Lantern by SoFi can help you explore auto refinancing options. Just fill out one simple form and compare offers from multiple lenders in our network.Find and compare auto loan refinance options with Lantern.

Frequently Asked Questions

Do I qualify for refinancing?
What will my new loan payment be after refinancing?
What will my new interest rate be after refinancing?
How long will my new loan term be after refinancing?
Photo credit: iStock/tommy

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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