Key Takeaway: Refinancing a car loan replaces your current auto loan with a new one, and it makes sense when the new loan costs less after fees — usually because your credit has improved or rates have dropped since you signed. Borrowers who refinanced in late 2025 saved an average of $84 a month, according to Experian. The trade-offs are possible fees, a small and temporary dip in your credit scores, and more total interest if you stretch out your term.
Refinancing your car makes sense when a new loan would cost you less than the one you have. Maybe you’re working with a tighter budget than you were when you first got your auto loan, and you’d like a lower monthly payment. Or maybe your credit has improved since then, and you’d like a lower rate.
Refinancing isn’t free, and it isn’t always the right move. Whether it pays off depends partly on when you financed: bank rates on new-car loans averaged about 8% in 2023 and 2024 and about 7% in mid-2026, according to the Federal Reserve. Run your numbers in Credit Karma’s auto refinance calculator before you apply.
- Pros and cons of refinancing a car
- When does it make sense to refinance your auto loan?
- When shouldn’t you refinance your car?
- Does refinancing your car hurt your credit?
- FAQs about auto refinancing
Pros and cons of refinancing a car
Refinancing can save you money on interest and give you more flexibility with your monthly budget — but it can also cost you in fees, added interest and a temporary credit score dip.
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 or lengthen your loan term.
- You can remove a cosigner if there was one on your original loan.
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, such as prepayment fees.
- You may experience a small dip in your credit scores.
- There may be limited options for older cars.
When does it make sense to refinance your auto loan?
Refinancing your auto loan makes sense when a new loan would cost you less than the one you have — usually because your credit has improved, rates have fallen since you signed or you took the dealer’s financing without shopping around. The difference can be large: in the second quarter of 2026, borrowers with prime credit paid an average of 8.81% on used-car loans, while near-prime borrowers paid 13.93%, according to Experian. Check your contract for a prepayment penalty (a fee for paying off the loan early), then run the numbers before you apply.
Your credit scores have improved
If your credit scores have improved since you signed, you may now qualify for a lower rate than your current loan carries. Lenders may look at an auto-specific scoring model or your base credit scores, but either way, higher scores signal lower risk and usually earn a lower rate. Lenders price auto loans by credit tier, and the gap between tiers is wide: in the same Experian data, the average APR on a new-car loan was 9.71% for near-prime borrowers (scores of 601 to 660) and 6.15% for prime borrowers (661 to 780). Not sure whether your scores have moved? Checking your free credit scores on Credit Karma will show you which range you’re in now.
Rates have dropped since you got your loan
Whether rates have dropped depends on when you financed. Bank rates on new-car loans averaged about 5% in 2021 and 2022, climbed to about 8% in 2023 and 2024, and eased to about 7% by mid-2026, according to the Federal Reserve. If you financed in 2023 or 2024, the market has moved in your favor, and a lower rate may be available even if your credit hasn’t changed. If you financed in 2021 or 2022, today’s rates are higher than the one you locked in, so a better deal will have to come from improved credit or a lender willing to beat your rate, not from the market.
You took the dealer’s financing
Dealers arrange loans through their own lender partners, and they might not offer you the lowest rate you qualify for, according to the Consumer Financial Protection Bureau. If you signed at the dealership, especially without negotiating the rate or comparing offers first, refinancing with a bank, credit union or online lender could save you money over the rest of the loan. You may need to look beyond your current lender, though: some lenders won’t refinance a loan they already hold. Capital One, for example, only refinances loans from other financial institutions.
You need a lower monthly payment
If you’re struggling with a high interest rate or a monthly payment you can’t comfortably afford, refinancing may get you better terms. Stretching the balance over a longer term brings the payment down, and in a tight stretch that relief can matter more than the total cost. Just know the trade-off: a longer term usually means more interest over the life of the loan, and you could still owe a large balance after your car has lost much of its value. On a $20,000 balance at 8.81%, for example, going from 60 months to 72 cuts the payment from about $413 to about $359 but adds roughly $1,000 in interest. One approach is to refinance for the lower payment now, then pay extra each month once your finances recover.
How much can you save by refinancing?
Savings depend on your balance, both rates and how much time is left on the loan. Say you owe $20,000 with 60 months to go at 10%. Your payment is about $425 a month. Refinance that balance over the same 60 months at 8%, and the payment drops to about $406 — roughly $19 a month and about $1,165 in interest over the life of the loan. Fees and any prepayment penalty come out of those savings, so compare the total cost of both loans, not just the payment.
How does refinancing a car work?
Refinancing involves replacing your current auto loan with a new one, ideally with better terms. Your new lender pays off the old loan, and you begin making payments on the new loan instead. Refinancing can lower your interest rate, reduce your monthly payment or change your repayment term. Keep in mind, though, that it may temporarily lower your credit scores, since lenders will likely do a hard pull on your credit when you apply.
When shouldn’t you refinance your car?
Refinancing isn’t advisable near the end of your auto loan or when you owe more than your car is worth. It also may not be the best choice if rates have risen since you got your loan, if fees outweigh the savings, or if your car doesn’t meet the age and mileage limits set by many lenders — for example, some lenders won’t refinance cars that are more than 10 years old.
- Near the end of the loan, there’s little left to save. Most of each payment is already going toward principal rather than interest, so even a much lower rate won’t change the total by much, and fees or a prepayment penalty can wipe out what’s left.
- The test is simple: the new loan has to cost less than the old one after fees and any prepayment penalty. If refinancing results in a higher interest rate or more total interest over the life of the loan, it’s probably not the right move. Check your contract before you apply: refinancing means paying off the original loan in full, and some contracts charge a fee for that.
- It’s typically easier to find a lender when your car is worth more than your loan balance, and depreciation erodes a car’s value fast, especially in the first year. If you owe more than the car is worth — being “underwater” on the loan — many lenders will pass. A relatively new car that still has equity puts you in a better position.
- It may be possible to refinance your car loan if you have bad credit. But going this route isn’t advisable unless your credit has improved since you got your original auto loan.
Does refinancing your car hurt your credit?
Yes — refinancing can cause your credit scores to dip, since lenders usually run a hard inquiry when you apply for a loan. The impact is typically minor, usually fewer than five points, and your scores will likely recover over the following months if you make on-time payments. Rate-shopping inquiries generally count as a single inquiry if they’re made within 14 to 45 days of each other, depending on the scoring model, according to the Consumer Financial Protection Bureau.
If you’re approved for the new loan, your average account age will also decrease, which can cause another temporary dip in your credit scores. For that reason, it’s best not to refinance right before you apply for other credit, such as a mortgage.
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.
What’s next
If a new loan would cost you less, the next step is to get real offers in hand. Check your credit scores first so you know which tier you’re in. Then gather your current loan details (the payoff amount, your APR and the number of months left) and compare offers from at least two or three lenders within a 14-to-45-day window so the inquiries count as one. From there, refinancing a car loan comes down to a few steps: gather your documents, prequalify where you can, apply and let the new lender pay off the old one.
Auto refinancing FAQs
Many lenders want to see at least six months of on-time payments on your current auto loan before considering you for refinancing. To access the widest pool of lenders, it makes sense to wait at least six months after purchase.
You can refinance as many times as lenders will approve you. But refinancing pays off your current loan early, so if that loan’s contract includes a prepayment penalty, you’d have to pay it. And each application usually means a hard inquiry, which can cause a small, temporary dip in your credit scores.
It depends on when you financed. Bank rates on new-car loans averaged about 8% in 2023 and 2024 and about 7% in mid-2026, according to the Federal Reserve, so a loan from those years may be worth repricing. If you financed in 2021 or 2022, when rates were closer to 5%, only improved credit is likely to beat your rate.