Should you refinance your car? Pros and Cons

Written by: Credit Karma Staff
• Updated •5 min read • Leer en español
Young man cleaning his newly refinanced carImage: Young man cleaning his newly refinanced car
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Have you taken out an auto loan to pay for your car? You may be able to refinance that loan to lessen your financial burden.

Refinancing a car loan involves taking on a new loan to pay off the balance of your existing car loan. Most of these loans are secured by a car and paid off in fixed monthly payments over a predetermined period of time — usually a few years.

People generally refinance their auto loans to save money, as refinancing could score you a lower interest rate. If you’re unsure whether refinancing a car loan is right for you, read on to learn about the pros and cons and when it may make the most sense.

Pros and cons of refinancing a car

Pros of refinancing your car loan

  • You could get a lower interest rate, which may save you money.
  • You could decrease your monthly payment.
  • You could shorten your loan term.

Cons of refinancing your car loan

  • You may pay more in interest over the life of the loan, especially if you lengthen your loan term.
  • You could end up owing more than your car is worth.
  • You may have to pay additional fees like prepayment fees.

When should you refinance your car?

A decision as big as auto refinancing will depend on a number of individual factors. With that said, you may want to give it some extra-serious thought in the following instances:

  • Interest rates have dropped since you took out your original auto loan. Even a modest dip can translate into meaningful savings over the life of your loan. The lower rate could greatly reduce your total interest costs.
  • Your credit has improved since you first financed. An upgrade in your credit score can open doors to lower interest rates, meaning refinancing might yield better loan terms than your original one.
  • Your current loan has no repayment penalties. If repaying your existing loan early doesn’t trigger any fees, refinancing can be cleaner and more cost-effective.
  • You’re having trouble keeping up with bills each month. Even if you’re not able to secure a lower interest rate, it may still be worth trying to find a loan with a longer repayment period if your immediate goal is to reduce your monthly car payments. But keep in mind that you’ll generally pay more interest overall if you have a loan with a longer term.

When shouldn’t you refinance your car?

Refinancing a car can save you money, but it’s not always the best option. You may want to hold off on refinancing if any of these scenarios apply to you.

  • You’ve already paid off most of the original loan. Since interest is typically concentrated at the beginning of your loan, once you’re far into your term, refinancing is unlikely to deliver significant interest savings.
  • Your car is old or has high mileage. Lenders may impose limits. For example, some banks won’t refinance cars that are older than 10 years or have more than 125,000 miles on them.
  • You’re planning to apply for new credit soon. A hard credit inquiry from refinancing can temporarily dent your score, potentially complicating applications for mortgages or premium credit cards.
  • Financing fees outweigh the benefits. It’s important to look out for any fees associated with refinancing. For example, you may be subject to prepayment penalties for paying off your current auto loan earlier than planned with your refinance loan.

How difficult is it to refinance?

Each lender has a variety of requirements. It can be difficult to sort through them all, but Credit Karma can help you narrow down some of the options.

One lender requirement you’ll want to be aware of is mileage. Also, be aware that some lenders may not refinance loans for your vehicle’s make or model.

You may also need to look outside your current lender for a loan. While some lenders will refinance an existing loan they’ve given you, other lenders won’t.

Generally speaking, it’s easier to find a lender who’ll work with you when your car is worth more than your remaining loan balance.

New cars can lose about 20% of their original value within the first year, and an average of 15% to 25% each of the next four years, according to Carfax. So time is of the essence. Some lenders won’t even consider refinancing an older car. If your car is relatively new and still has equity, now could be a good time to refinance.

Calculate your auto loan refinance

Use the auto refinance calculator to estimate your monthly payments and how much you may be able to save by refinancing your current auto loan.

Auto refinancing FAQs

What does refinancing mean for a car?

Refinancing your car means you’re taking out a new loan and replacing your old loan with your new one. Your new loan will pay off your old loan, and you’ll start making payments to your new lender. You may want to refinance your car loan if your credit has improved or your situation has changed since you took out your original loan. Refinancing a car can often reduce the loan term or lower monthly payments.

Does refinancing your car hurt your credit?

Refinancing your car can temporarily lower your credit score. When you formally apply for a loan, a lender will likely do a hard pull of your credit, which increases the number of hard inquiries on your credit report, therefore lowering your credit score. If you’re accepted for the loan, your average account age will also decrease, causing another temporary dip in your credit score.

Is it ever a good idea to refinance your car?

Refinancing your car can be a good way to gain short-term financial flexibility or to save money throughout the life of your loan. If your credit situation has improved since you took out your original auto loan, you may be able to get a better interest rate if you refinance. Extending your loan term may reduce monthly payments, but you’ll likely pay more in interest over the life of the loan. Shortening your loan term can increase monthly payments but could help you save on interest in the long run.

Next steps

Refinancing can save you money in interest or stretch out your loan payments, but you should only consider it when the circumstances are right.

If interest rates are lower or your financial situation has improved, it may be worth shopping around for a loan with better terms. If your credit scores haven’t gotten better but you want to refinance, it may still be possible. Check out our article on how to refinance a car loan to learn more about the refinance process.