4 Helpful Reasons To Refinance a Car Loan & Can it Actually Save Money?

By Shawn Longmore •  Updated: 03/04/22 •  11 min read
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Refinancing a Car Loan

This article will answer why someone would refinance a car loan, how refinancing can help you save money, what’s a reasonable interest rate, and much more! So read on to find out everything you need to know about refinancing your vehicle.

Refinancing is the process of replacing one auto loan with another at a lower interest rate. It may sound like an easy way to save some cash, but many things go into refinancing. Before you decide to take this route, make sure you weigh all the pros and cons.

When Should You Refinance

The best time to refinance is when interest rates drop below your current interest rate. However, two other things to consider will determine if it’s the right time to refinance your existing loan.

  1. Has your credit rating improved? Your initial interest rate will likely be high with a poor credit score. However, making on-time payments for 1 to 2 years improves scores in most cases, making it easier to refinance and get a better rate.
  2. Does your current loan balance have equity? Unfortunately, your vehicle depreciates yearly, making it difficult to build enough equity to refinance it. However, after a couple of years, there should be enough equity to refinance the car.

When Should You Not Refinance

It’s not always a good idea to refinance if your current terms are favorable. However, if you fall into any of the scenarios below, you may want to reconsider. 

  1. The loan is paid off or almost finished: If you only have one year remaining on your original car loan, or there’s no remaining balance, it’s probably a good idea to avoid refinancing and pay off the balance.
  2. Your automobile has high mileage: If you’re trying to refinance a car with high mileage, an institution will most likely turn you down. A financial institution considers this type of loan high risk and, in most cases, will reject it.
  3. There are too many fees or penalties: Some high-interest lenders might charge additional application fees or penalties for paying off your account early. Leaving your original lender to refinance with one that has high application fees or penalties for paying off the balance early could end up costing you more money in the end.

Auto Refinance Calculator

The auto loan calculator below will help you determine an estimate for your new payment amount. Start by entering the current loan payoff amount in the vehicle value field. After that, move the slider to match your expected new auto loan rate, enter the number of months you plan to refinance, then add an initial deposit if one exists.

The monthly car payment amounts displayed by the calculator are rough estimates based on your selections. Contact the financing department within a bank for the lowest rates and actual savings based on your credit pull.

Preparing for the Refinance Process

There are some initial steps to take before initiating the application process for your vehicle. Below are some key points that you’ll want to consider when preparing for the refinancing process:


  1. Is it wrong to extend my auto loan term? If you’re having trouble making your current payments, an extended repayment period may benefit you. But, remember you’ll ultimately pay more for the vehicle in interest if you extend the loan length.
  2. Can I refinance a car that’s older than ten years in age? Unfortunately, some auto refinancing institutions are hesitant to refinance vehicles exceeding 7 to 10 years in age. For example, we found Capital One only finances vehicles less than seven years old.
  3. How long should you have your car before refinancing? Each lender will have different requirements preventing you from refinancing within a specific amount of time. For example, some lenders may allow you to refinance after six months, while others may only allow you to do so after one year.
  4. If I refinance a car, will I receive money back? In most cases, cash-out refinance loans only work if there’s equity in the vehicle. Unfortunately, getting money back after refinancing a car doesn’t often happen since they usually depreciate at roughly 20-25% each year.
  5. Can I refinance a car loan with poor credit? Yes! As long as you meet the requirements, you can still apply for a car loan even if you have poor credit. In most cases, a score over 650 will benefit you.
  6. Is refinancing an auto loan for 72 months bad? The maximum loan term shouldn’t be a concern unless you plan to buy another vehicle within the next few years. It’s more important to know what the total cost of the loan is going to be. 
  7. What’s the average APR for auto loans? According to Experian Automotive, the national average APR for auto loans is currently at 4.7% when writing this article. The average APR for used cars is higher at 5.3%, while the average APR for new cars is slightly lower at 4.5%. If you have bad credit, lenders may offer you an interest rate of 10% or higher. It’s best to avoid high rates if you plan to pay the car off quickly. Check with your local lender to get an exact rate based on your credit score.
  8. Is a personal loan better than refinancing a car loan to lower payments? Private loans will typically have higher interest rates and an origination fee, making them less attractive options. But, if you need more flexibility, a personal loan might be right for you.
  9. What should my credit score be to get a reasonable interest rate? Credit scores range between 300-850 points. Lenders tend to look for borrowers who have a credit score above 700. However, if you don’t have excellent credit and your score is below 700, you might qualify for a rate discount after 1 to 2 years of on-time payments. In addition, we recommend setting up automatic payments to ensure there aren’t any gaps in your payment history.
  10. Should I refinance my car with the current lender? Refinancing through your previous lender might be easier since all your data is already in their system. However, you may get a better rate by shopping around.
  11. Is it better to refinance through credit unions or banks? Most people think that credit union lending is cheaper because they’re not as expensive as traditional banks. However, this isn’t always true. Some credit unions charge higher fees and require higher down payments. Do your homework and shop around before making a final decision on which type of lender to use.
  12. Is there a penalty for paying off a car loan early? No, a prepayment penalty isn’t standard. However, some institutions require you to pay the remaining interests on a loan when paying it off early.
  13. Can I apply with multiple creditors? Yes, but numerous credit inquiries can lower your score unless the banks perform soft credit inquiries, so do some research before applying to multiple places.
  14. How does refinancing impact my credit score? Refinancing won’t necessarily hurt your credit score. However, it can cause a temporary dip in your score until the original car loan drops off your credit report.
  15. What are lease buyout loans? Lease buyouts allow you to pay off a leased vehicle by buying it at its fair market value. This option is available on leased vehicles.

Final Thoughts

Refinancing an auto loan is one way to save money and improve your financial situation. It’s also a great way to reduce debt and build credit. However, before you make a decision, consider how much you need to borrow, what kind of payment term you want, and whether your credit score is good enough to accommodate your requirements.

Auto Glass Locator is not a financial advisor, lender, bank, or other financial institution. However, we performed a lot of research to write this article to help you decide whether to refinance your car or not. Consider sharing this article if you found it helpful.

Shawn Longmore

Shawn is the founder of Auto Glass Locator and enjoys providing articles related to automotive parts and services. His mission is to make it easy for everyone to find all the information they need in one spot. Each year he continues to help more people find great deals on auto glass and other automotive services.

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