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When Should or Shouldn’t You Refinance a Car Loan?

When Is the Right Time to Refinance a Car?; If your credit score has improved, if loan rates are down, or if you have positive equity, it might be a good time to refinance your car loan.
Susan Guillory
Susan GuilloryUpdated August 15, 2022
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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.
“Refinance your auto loan today!” You’re being hit with ads online and flyers in the mail telling you, “now’s the time to refinance your car!” They promise you low rates, and you have to admit, you’re intrigued.But you’re just not sure about whether you should take advantage of any of these opportunities.You’re right to hesitate. When to refinance a car depends on several factors. Just because you could get what sounds like a great deal doesn’t mean that now’s the best time for you to refinance your vehicle.

7 Times When You Should Refinance Your Car

So, when should you refinance your car? Here are seven situations in which you might want to consider a car loan refinance.

1. When You Can Get a Lower Interest Rate

Interest rates change all the time, especially as the economy rises and falls. Monetary policy from the Federal Reserve may influence consumer loan rates. Refinancing may be right for you if you can lock in a lower interest rate.Among the pros and cons of refinancing a car is it may provide you with a lower interest rate (pro) while temporarily causing your credit score to drop from a hard pull inquiry (con).Refinancing for a lower monthly payment in some cases may extend your term, and extending your term can saddle you with more interest charges over the life of your loan. An auto loan refinance calculator can help you see whether a refinanced loan offer may increase or decrease your total interest costs.

2. When Your Credit Has Improved

Another factor that may change over time is your credit. Credit-building activities (including paying your auto loan on time each month) may increase your credit score. If, when you check your score, you see that your credit has improved, you may qualify for lower interest rates on a refinanced auto loan.Lenders look at several factors when determining your annual percentage rate of interest and the terms they will offer you. If your credit wasn’t excellent when you got your loan, you might not have gotten the best APR possible. But if your credit has improved since then, refinancing could open up better offers.The below table highlights average car loan rates for each credit risk group, according to Experian data for the first quarter of 2022:
Risk and Credit ScoreNew Vehicle: Average Loan Interest Rate by RiskUsed Vehicle: Average Loan Interest Rate by Risk
Super Prime (781-850)2.40%3.71%
Prime (661-780)3.56%5.58%
Near Prime (601-660)6.70%10.48%
Subprime (501-600)10.87%17.29%
Deep Subprime (300-500)14.76%20.99%

3. When Your Car Is Worth More Than You Owe

If you’ve kept your vehicle in top-notch shape, and perhaps have been aggressive about paying more than you owed each month on the loan, your car could be worth more than the balance remaining on your loan.If you’d like to take your time paying off the remainder, you might consider refinancing. There are several tips for how to refinance auto loans, such as comparing your options and paying attention to the details.

4. When You Can Pay Your Car Off Faster

Some borrowers may prefer the longest repayment period possible for their auto loans because it means the lowest monthly payment. But those longer-term loans usually have higher interest rates than loans with shorter repayment periods.If you can afford to make larger monthly payments, you’ll probably pay less in interest and get your car paid in full faster if you can refinance.

5. When You’re Struggling with High Payments

While you may not benefit from lower interest if you refinance over a longer period, it could help if you’re stressing to pay that higher amount each month. Let’s say you currently have a loan with a term of four years and are paying $500 a month, which is really eating into your budget. Refinancing for a six-year term could drop your monthly payment to, let’s say, $375, so you might gain a little financial breathing room. Just be aware that you might have to pay more in interest over the life of the loan.

6. When You’re Unhappy with Your Lender

If you feel stuck with a lender who isn’t offering great customer service or is otherwise making your business relationship stressful, realize that you may hold the power to walk away by refinancing with another lender.Before deciding to refinance your auto loan, get familiar with auto loan terminology so you understand things like prepayment penalties, APR, and other terms that you’ll find in the fine print of your current loan agreement.

7. When Your Original Loan Was Through the Dealer

Refinancing may be ideal if you have car loan debt through the dealer. If you signed a retail installment sale contract when buying a vehicle off the lot of a dealership, the dealer may have sold the retail installment contract to a third-party lender, such as a bank or finance company. This is called indirect financing because it leaves you indebted with a third-party financial institution that didn’t provide you with the auto loan financing directly. Dealerships that arrange indirect financing don’t necessarily arrange the best terms and conditions for you, so exploring your refinancing options may be right for you.How soon can you refinance? You may have the option to refinance your auto loan almost immediately.Recommended: Tips for Saving Money on a Car

When Shouldn’t I Refinance My Car Loan?

Just as important as knowing when to refinance a car is knowing when not to do it. It can be tempting when you get those offers in the mail to refinance, but there are a few situations where you shouldn’t. Here are five to be aware of:

1. When You’re Upside Down on Your Loan

If you owe more on your car loan than the car is worth, refinancing likely won’t help the situation. In fact, many lenders won’t even approve a loan if this is your situation. Your best bet might be to keep chipping away at what you owe.One way consumers may avoid upside down auto loans is by making a sizable down payment when buying new or used vehicles.

2. When Your Car Is Older

The older your vehicle, the less likely a lender is to approve a refinance. Bank of America, for example, won’t fund loans for cars that are more than 10 years old or have more than 125,000 miles on them.Why? Cars lose their value so rapidly that an older model may not be worth much by the time you seek financing for it. If you aren’t able to pay your loan, the lender has the right to seize the vehicle, but if it’s not worth much, that right doesn’t do the lender much good.

3. When You Don’t Need to Refinance a Lot

If you owe less than $7,500, you may have trouble finding a lender who wants to refinance such a small amount. That’s the threshold Capital One, for example, requires for auto refi loans, and other lenders may have similar requirements.

4. When You Bought the Car Recently

Refinancing might not be right for you if you bought your car recently. The value of a new car can plummet immediately once you drive it off of the lot. Unless you’ve made a sizable down payment on the car, your auto loan financing may be underwater when your repayment term begins. As mentioned earlier, refinancing might not be advisable if you’re upside down on your loan.

5. When Your Loan Has Prepayment Penalties

Another time when refinancing might not be right for you is if your existing car loan includes a prepayment penalty clause. A prepayment penalty is a fee that lenders may charge if you pay your loan off early.Getting a refi loan in some cases may trigger a prepayment penalty. That’s because refinancing pays off your existing loan and replaces it with the terms and conditions of a new financing agreement. You can check your original loan agreement to see whether it includes a prepayment penalty disclosure.

How Difficult Is It to Refinance a Car Loan?

It’s not necessarily difficult to refinance a car, but it helps to start by knowing what lenders require in terms of how old the car can be and how many miles can be on it. You’ll also be asked how much you owe, so have that information handy.The most time-consuming part of refinancing a car loan may be shopping around. Don’t simply take the first offer you get. It’s also a good idea to see if you’re prequalified for a refinancing offer with the bank you already have a relationship with as well as with online lenders. Spending time seeing what you qualify for could end up saving you significantly.You can also check your credit score before you apply, since that can impact what you’re able to qualify for.

Pros and Cons of Refinancing an Auto Loan

As a consumer, you may ask, “Should I refinance my car?” There’s no easy answer to this question. Your specific situation may determine whether and when to refinance a car loan. Below we highlight some of the pros and cons of refinancing an auto loan:

Pros of Auto Loan Refinancing

  • May give you a lower interest rate
  • May give you a lower monthly payment
  • May give you a longer repayment term

Cons of Auto Loan Refinancing

  • You may need good credit to qualify
  • It may require a hard inquiry that can hurt your credit score
  • You may pay more interest over the life of your auto refi loan
Pros of Auto Loan RefinancingCons of Auto Loan Refinancing
May give you a lower interest rateYou may need good credit to qualify
May give you a lower monthly paymentIt may require a hard inquiry that can hurt your credit score
May give you a longer repayment termYou may pay more interest over the life of your auto refi loan

Is Refinancing Worth It?

Ultimately, a refi should be financially beneficial, either because you’ll pay less in overall interest by refinancing, or because you’ll relieve a financial burden from a monthly loan payment you can’t afford. Otherwise, it may not be worth it to refinance your auto loan.Beyond the loan term and interest rate, another factor to take into account as you evaluate a car loan refi is how much you may have to pay in fees and/or penalties. These may or may not include:
  • A lender fee (typically could be $10)
  • A title fee (typically less than $75)
  • Prepayment penalties (on your existing loan)
These should all be factored into your decision, since they can all affect the bottom line. Consumers may ask, “What happens to car loans when someone dies?” The answer is that car loans do not simply disappear when a borrower dies. A surviving spouse may be responsible for paying the debt, or a lender may move to repossess the vehicle.As you consider whether refinancing is a good move or not, find the answer to the question: how much does it cost to refinance a car? If, after fees and other expenses, you’re better off and paying less than before, it could be worth it.If you’re drowning in car loan debt, you may wonder, “Can someone take over my car loan?” Transferring an auto loan can be a complex process, but it may be an option for you.

Does Applying for an Auto Loan Affect Your Credit Score?

Applying for an auto loan can hurt your credit score initially, but it may also benefit your credit score if you make required car payments on time.The way how car loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include interest charges.Borrowers with existing car loans may qualify for auto loan refinancing. Getting your auto refi loan application approved means a lender will pay off your original loan agreement and replace it with new loan terms. The refinanced loan may feature a lower monthly payment than your original loan.Applying for auto loans and auto loan refinancing can initially impact your credit score if lenders conduct a hard pull inquiry into your credit report. But know that if you’re shopping around, getting preapproved by multiple lenders may show up on your credit report as just a single inquiry as long as they’re within the same two-week period.Refinancing a car loan with bad credit is possible, but you probably won’t get a great interest rate. If it’s possible, it might be worthwhile to spend time building your credit so you may qualify for a better rate down the road.

Auto Loan Refinancing Rates

Knowing when to refinance a car can depend on all the factors we’ve covered in this article. Before going down this road, ask yourself why you want to refinance. Is it because you want to pay less in interest or possibly lower your monthly payment? Or are you just feeling like you’ll miss out on something because you’re getting all those refi offers in the mail?If a refi seems like the right decision, you may want to consider turning to Lantern by SoFi for auto refinancing. You can fill out one simple form to compare multiple offers from our network of lending partners.

Frequently Asked Questions

When is refinancing an auto loan worth it?
Can refinancing a car hurt your credit score?
When should you not refinance?
Should I refinance now or wait?

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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