Auto loan refinancing is one of the most overlooked opportunities to save money. If you financed your car when your credit wasn't great, or if rates have dropped, you could potentially save thousands of dollars by refinancing.
What is Auto Loan Refinancing?
Refinancing your auto loan means replacing your current loan with a new loan (typically from a different lender) at a better interest rate or more favorable terms.
When Auto Loan Refinancing Makes Sense
1. Your Credit Score Has Improved
Most people finance cars when they're first purchased. Since then, your credit may have improved, which means you qualify for better rates now.
Typical rate by credit score:
- Excellent (720+): 4-7% APR
- Good (660-719): 6-10% APR
- Fair (600-659): 10-14% APR
- Poor (under 600): 15-20% APR
Action: If your credit has improved by 50+ points since you bought the car, refinancing likely makes sense.
2. Interest Rates Have Dropped
Even with the same credit score, market rates fluctuate. If rates have dropped 1-2% since your original loan, you could save significantly.
Check: Current auto loan rates at credit unions, banks, and online lenders.
3. You Have Equity in Your Vehicle
You can refinance if:
- Car is worth more than you owe
- Gap is sufficient (ideally $2,000+ in equity)
To check equity:
- Use Kelley Blue Book or Edmunds for car value
- Subtract what you owe
- Positive number = you have equity
4. You Want to Lower Monthly Payments
If money is tight:
- Refinancing to a lower rate = lower payment
- Or extend the term (though this increases total interest)
Warning: Extending term to lower payment can be costly long-term.
5. You Want to Pay Off Faster
If your finances improved:
- Refinance to a shorter term (maybe 3 years instead of 5)
- Keep payments similar but pay off faster
- Save on total interest paid
When NOT to Refinance
Your Current Rate is Already Good
If you already have a rate under 6%, refinancing may not save much after fees.
Math check: Calculate savings - fees. If less than $500-1000 in total savings, it may not be worth the hassle.
You're Almost Paid Off
If you've got less than 12 months left, refinancing doesn't make sense:
- Fees may exceed savings
- Not worth resetting the clock
Your Car Has Depreciated Too Much
If you owe more than the car is worth:
- No lender will refinance (negative equity)
- Must pay down balance first or wait
Prepayment Penalties
Some lenders charge fees for paying off early. Calculate:
- Refinancing savings
- Minus prepayment penalty
- Minus refinancing fees
If still positive, it makes sense.
How to Refinance Your Auto Loan
Step 1: Check Your Current Loan
Get these details:
- Current rate
- Remaining balance
- Monthly payment
- Remaining term
- Payment history
Check: Credit score (Equifax, Experian, TransUnion - free once annually at AnnualCreditReport.com)
Step 2: Research Lenders
Compare these lenders:
Credit Unions:
- Often best rates for members
- Easy qualification
- Check your employer's credit union
Online Lenders:
- LendingTree
- LightStream
- AutoPay
- RefiJet
Banks:
- Your local bank
- Online banks
- Some offer pre-qualification without hard pull
Step 3: Get Quotes
Apply to 2-3 lenders (within 14 days it only counts as one hard inquiry):
- Compare rates offered
- Factor in any fees
- Calculate true savings
Questions to ask:
- What's the interest rate?
- Any origination fees?
- Prepayment penalties?
- Minimum loan amount?
- Maximum loan term?
Step 4: Calculate Total Savings
Example:
- Current: 415/month, $4,900 total interest
- New: 438/month, $1,024 total interest
Savings: 23 (but done 12 months sooner)
Step 5: Apply and Refinance
Once you've chosen the best offer:
- Submit application
- Provide required documents:
- Current registration
- Insurance info
- Proof of income
- Recent pay stubs
- Get approved
- New lender pays off old lender
- Make payments to new lender
Common Mistakes to Avoid
1. Not Shopping Around
Don't just accept the first offer. Rates vary significantly.
Pro tip: Get quotes from at least 3 lenders.
2. Focusing Only on Rate
Also consider:
- Total interest paid
- Monthly payment amount
- Fees (origination, etc.)
- Prepayment penalties
- Lender reputation
3. Extending Term Too Much
Lower rate but much longer term can result in paying MORE total interest:
- Original: 4,900 interest
- Refi to 7 years @ 6% = $4,600 interest
- Only saves $300 despite lower rate
Always calculate total interest, not just monthly payment.
4. Not Checking Credit First
Check your credit before applying:
- Errors on your report can be fixed first
- Know if you're likely to qualify
- Avoid unnecessary hard inquiries
5. Skipping the Math
Before refinancing:
- Calculate total interest saved
- Subtract fees
- Ensure savings are meaningful ($500-1000+)
If savings are small, it may not be worth the hassle.
Real-World Example
Original Loan (3 years ago):
- $30,000 @ 12% APR, 72 months
- Monthly payment: $561
- Total interest: $10,383
Current Situation:
- Balance remaining: $18,000
- Time left: 36 months
- Credit improved from 640 to 750
Refinanced Loan:
- $18,000 @ 5.5% APR, 36 months
- Monthly payment: $544
- Total interest: $1,584
Savings:
- Interest remaining on old loan: ~$3,500
- Interest on new loan: $1,584
- Savings: $1,916!
Take Action Today
Auto loan refinancing is an underused strategy that can save thousands. Many people don't realize their credit improved or rates dropped since they bought their car.
Ready to see how much you could save? Start Creditmaxxing to get an estimate of potential savings with current market rates.
Checklist for refinancing:
- ✅ Credit improved since purchase
- ✅ Rates have dropped
- ✅ Have equity in vehicle
- ✅ Savings justify refinancing costs
- ✅ Ready to apply
Remember: The best time to refinance your auto loan was when you realized you could get a better rate. The second best time is now.