Auto refinance guide
How Auto Refinance Savings Work, and What to Check Before You Refinance
Refinancing a car loan can lower your payment, your total interest, or both. It can also cost you more if the term stretches out or fees eat the savings. Here is how the math works and what to check first.
What refinancing actually does
When you refinance a car loan, a new lender pays off your current loan and you start making payments on a new one. The car is the same, and the debt is roughly the same size. What changes is the interest rate, the number of months you have left to pay, and sometimes the fees rolled into the new loan.
Those three things decide whether you save money. A lower rate on the same remaining term almost always lowers total interest. A longer term can lower the monthly payment even with no rate drop, but it usually raises the total you pay.
A worked example
Say you owe $19,500, pay $485 a month, and have 48 months left. Working backward with the standard loan formula, that loan carries an APR of about 9%. If you kept it, you'd pay about $3,780 in interest over the remaining four years.
| Option (illustrative 6.2% APR for the new loans) | Monthly payment | Interest left to pay |
|---|---|---|
| Keep current loan (~9%, 48 months) | $485 | ~$3,780 |
| Refinance, same 48 months | ~$460 | ~$2,568 |
| Refinance, stretch to 60 months | ~$379 | ~$3,228 |
| Refinance, stretch to 72 months | ~$325 | ~$3,901 |
Keeping the same 48 months saves about $1,200 in interest. Stretching to 72 months gives the lowest payment, about $160 less a month, but you'd pay more interest than if you never refinanced, and you'd be making car payments two years longer. Neither choice is wrong. A lower payment can matter a lot when a budget is tight. Just know which one you're choosing.
The 6.2% rate in this example is a round number for illustration, not a quote. Your rate depends on your credit, the car's age and mileage, the loan amount, and the lender.
What to check before you apply
1. Your payoff amount, not just your balance
The balance on your statement and the amount needed to close the loan can differ, because interest builds up daily. Ask your current lender for a payoff quote. The new loan has to cover that number.
2. Fees on both ends
- Prepayment penalty: Some auto loans charge a fee for paying early. Your loan contract will say. Many don't, but check.
- New-loan fees: Some lenders charge origination or processing fees.
- State title and lien fees: Moving the lien to a new lender usually means a title update, and many states charge for it.
If fees get rolled into the new loan, you pay interest on them too. In the example above, adding $400 of fees to the 48-month refinance cuts the interest savings from about $1,200 to about $760.
3. How many months you really have left
Refinancing late in a loan saves less, because most of the interest on an amortizing loan is paid in the early years. With a year or less left, the savings may not cover the time and fees.
4. Your credit, and how rate shopping affects it
Many lenders will prequalify you with a soft credit check, which doesn't affect your score. A formal application usually means a hard inquiry. Common credit scoring models count several auto loan inquiries in a short window as one, so it's generally fine to compare a few lenders in the same couple of weeks. The CFPB's credit reports and scores page explains how inquiries and scores work.
5. Whether the car is worth more than you owe
If you owe more than the car is worth ("negative equity" or being "upside down"), some lenders won't refinance, or they'll charge more. Many lenders also set limits on vehicle age and mileage.
6. Add-ons tied to the old loan
If you bought GAP coverage or a service contract with the original loan, ask whether it ends when that loan is paid off and whether you're owed a prorated refund. Decide whether you want similar coverage on the new loan.
When refinancing may not be worth it
- Your current rate is already close to what you'd be offered.
- You're near the end of the loan.
- Fees or a prepayment penalty wipe out most of the savings.
- The only way to get a lower payment is a much longer term, and you'd rather pay less in total.
Our auto refinance calculator will tell you when the estimated rate for your credit tier doesn't beat your current loan, instead of showing a made-up saving.
A simple process
- Find your payoff amount, current APR, and months left on your statement or lender account.
- Check your credit reports for errors at the official free site, AnnualCreditReport.com.
- Run your numbers in the calculator to see whether a lower rate is worth chasing.
- Get prequalified offers from a few lenders, such as your bank, a credit union, and an online lender or marketplace.
- Compare the APR, term, fees, and total cost, not just the monthly payment.
- Keep paying your old loan until you've confirmed it was paid off.
The CFPB has more consumer help on auto loans.
Run your own numbers
The free auto refinance calculator uses the inputs you choose and standard formulas. No sign-up, no credit check.
Open the auto refinance calculator