8 mins read 
Key takeaways
- Refinancing may make sense if you can qualify for a lower APR, lower monthly payment or better loan term.
- It can also help if your credit score has improved, your budget has changed or you want to remove a co-signer.
- A lower payment doesn’t always mean you’ll save money overall.
- Refinancing may not be worth it if you’re close to paying off your loan, owe more than your car is worth or fees cancel out the savings.
Refinancing your car loan means replacing your current auto loan with a new one, usually with a different rate, term or monthly payment.
For some borrowers, refinancing can lower monthly costs, reduce the amount paid in interest or make the loan easier to manage. But it’s not always the right move. A lower monthly payment can sometimes mean a longer loan term, which may cost more over time.
Before you apply, it helps to understand the pros and cons of refinancing a car loan and compare your current loan with any new offer.
Could you qualify for a better rate?
If your credit or finances have improved, refinancing may help you lower your APR or save on interest.
1. You may qualify for a lower interest rate
One of the biggest reasons to refinance a car loan is to get a lower interest rate.
Your interest rate helps determine how much borrowing costs you over the life of the loan. If you can refinance into a lower rate, you may be able to lower your monthly payment, pay less interest overall or both.
This can happen if market rates have dropped since you first financed your car. It can also happen if your financial profile is stronger now than it was when you first applied.
For example, if you bought your car when rates were high or accepted dealer financing without comparing offers, refinancing could give you a chance to see if a better rate is available now.
2. Your credit score or financial profile has improved
Your credit score is one of the factors lenders may use when reviewing your refinance application. If your score has improved since you took out your original loan, you may qualify for a better offer.
That improvement could come from making on-time payments, paying down credit card balances or building a longer credit history. Your income, debt and vehicle details may also factor into the lender’s decision.
If you’re worried about what applying could do to your credit, it’s worth reading about whether refinancing a car can hurt your credit score before moving forward.
3. You want a lower monthly car payment
If your monthly car payment feels too high, refinancing may help lower it.
A lower payment can come from getting a lower APR, extending your repayment term or both. This may give you more room in your monthly budget for other expenses.
But it’s important to look beyond the monthly payment. Extending your loan term can make each payment smaller, but it may also mean you’ll pay more interest over time.
If your main goal is making your payment more manageable, compare refinancing with other ways to decrease your car payment so you can choose the option that fits your budget.
4. You want to pay off your car loan faster
Refinancing isn’t only for lowering your payment. It can also help you pay off your loan sooner.
If your income has increased or your budget has more flexibility, you may be able to refinance into a shorter loan term. A shorter term can help you pay the loan off faster and may reduce the total interest you pay.
The tradeoff is that your monthly payment could go up. Before choosing a shorter term, make sure the new payment still fits comfortably in your budget.
5. You want to remove or add a co-signer
Refinancing may also help if you want to change who’s listed on the loan.
For example, you may want to remove a co-signer if your credit and income have improved enough to qualify on your own. This can be helpful if a parent, partner or other co-signer helped you get approved for your original loan and you’re now ready to take over the loan independently.
In some cases, adding a co-signer may help you qualify for a refinance offer if your own credit or income isn’t strong enough. But both borrowers should understand the responsibility before applying, because the loan can affect both credit profiles.
Refinancing goals and tradeoffs
| Goal | Refinancing may help if… | Watch out for… |
|---|---|---|
| Lower your APR | You qualify for a better rate than your current loan | Fees may reduce your savings |
| Lower your payment | You need more room in your monthly budget | A longer term may cost more overall |
| Pay off your loan faster | You can afford a higher monthly payment | Shorter terms can raise your payment |
| Remove a co-signer | You qualify for a loan on your own | Approval depends on lender requirements |
| Save on interest | Your new APR is meaningfully lower | Savings depend on your balance, rate and term |
When refinancing may not make sense
Refinancing can be helpful, but it’s not the right choice for every borrower.
It may not be worth it if you’re already close to paying off your loan. At that point, you may not have enough remaining interest to save much by refinancing.
It may also be risky if you owe more than your car is worth. This is often called being upside down or having negative equity. If that’s your situation, lenders may be less likely to approve the refinance, or the new loan may not improve your financial position.
Refinancing may also not make sense if the only way to lower your monthly payment is to stretch the loan much longer. That can help in the short term, but it may increase the total amount you pay in interest.
If you recently bought your car, timing can matter too. Some borrowers may be able to refinance soon after purchase, but it helps to understand how soon you can refinance a car loan before applying.
How to know if refinancing is worth it
To decide whether refinancing makes sense, compare your current loan with the new offer side by side.
Look at:
- Current APR vs. new APR.
- Current monthly payment vs. new monthly payment.
- Remaining loan balance.
- New loan term.
- Total interest you’d pay.
- Any fees tied to the new loan.
The lowest monthly payment isn’t always the best deal. A refinance offer may lower your payment by extending the loan, but that could mean paying more interest overall.
To get a clearer picture, compare the full cost of the loan, not just the monthly savings. Here’s more on how much you may be able to save by refinancing your auto loan.
Can you refinance with bad credit?
It may still be possible to refinance with bad credit, but your options could be more limited. Lenders may offer higher rates, stricter terms or require certain vehicle and income qualifications.
If your credit has improved even a little since you first got your loan, refinancing may still be worth checking. But if your credit has dropped, waiting and working on your score first may help you qualify for a better offer later.
Learn more about whether you can refinance a car loan with bad credit.
Bottom line
Refinancing your car loan may make sense if it helps you get a lower rate, lower payment, shorter term or better loan setup. It can also help if your credit has improved or you’re ready to remove a co-signer.
But don’t make the decision based on the monthly payment alone. Compare the APR, loan term, fees and total interest before choosing a new offer. The right refinance should make your loan easier to manage without costing you more than necessary.
FAQs
Is refinancing a car loan worth it?
Refinancing can be worth it if the new loan helps you lower your APR, reduce your monthly payment, pay off the loan faster or remove a co-signer. It may not be worth it if fees, a longer term or negative equity cancel out the benefit.
What’s the best reason to refinance a car loan?
The strongest reason is usually qualifying for a lower APR. A lower rate can reduce borrowing costs and may also lower your monthly payment.
Can refinancing lower my monthly car payment?
Yes. Refinancing may lower your monthly car payment if you qualify for a lower APR, extend your loan term or both. Just remember that extending the term may increase the total interest you pay.
Does refinancing a car hurt your credit?
Applying for refinancing may involve a hard credit inquiry if you move forward with a loan offer. That can cause a temporary dip in your credit score, but the impact depends on your overall credit profile.
