Can You Refinance a Car Loan & When Should You?

By Upstart Content Team | Updated March 29, 2022
reading time 7 min read
A teenage girl practices driving with her mother in a white car while discussing car refinancing loans.

If you got stuck with a high-interest auto loan or want to take advantage of new, low rates, you may be looking for a way out of your original loan. Well, we’ve got good news: refinancing your car loan can help you save money every month with a lower interest rate. But is refinancing a car loan right for you? 

In this guide, we’ll break down how car refinancing works, the benefits of refinancing your car loan, and when to consider a new auto loan. 

How does refinancing your car work?

The auto loan refinancing process is straightforward, once you understand how refinancing works. When you refinance your car, you replace your original car loan with new loan terms. You use the money from the new loan to pay the remaining balance on your first loan. Then, you start making payments on the new loan. 

In most cases, you can get approved for an auto refinancing loan online in minutes. If you decide to accept the loan terms, you’ll undergo a hard credit inquiry before signing some legal documents. Then, your lender will pay off your original loan, update your title, and begin collecting your monthly payments. 

Can you refinance a car with the same lender?

If you’re considering refinancing, you may think that you have to start from scratch—searching for lenders, getting prequalified, submitting an application, and so on. But you don’t always have to refinance a car loan with a different bank. In fact, you may be able to speed up the process by refinancing your loan with your current lender. 

Some banks and lending companies even offer special refinancing rates for established borrowers. That means you could leverage your relationship to snag a more affordable loan with better terms. You may have to provide updated personal and financial information, but the process is often faster and less complicated. 

With that said, refinancing with the same lender may not be the best option for you financially. To make sure you’re getting the best deal, take some time to shop around and compare rates from other lenders first.

How soon can you refinance a car loan after purchase?

So, you got stuck with high interest rates or a long repayment period after buying your car. You’re not alone—and you’re certainly not the only person wondering if you can refinance a car loan immediately. We’ve got some good and bad news for you.

The good news: you can technically refinance your loan whenever you want. The bad news? Your application may not get approved for at least 6 to 12 months after the initial loan. 

That’s the case for a couple of reasons. First, it takes anywhere from 2 to 3 months for your title to transfer from the manufacturer or previous owner after you buy your car. If the title isn’t in your name, most lenders will deny your loan application.

You may also need time to improve your credit score. More than likely, you noticed a slight drop in your score after you applied for your original loan. That’s because your loan provider ran a hard credit check, which shows up on your credit report and lowers your rating.

If you already have a good to excellent credit score (660 or higher on the VantageScore® scale), you may not have to worry about waiting for your credit to rebound. But if it’s lower, waiting gives you some time to boost your numbers—and your chances of getting a lower rate on your refinancing loan.

Can you refinance a car loan with bad credit?

Speaking of credit scores, if yours is less-than-stellar, you may not feel confident about your refinancing options. However, you may still qualify for a better deal.

For instance, if auto loan rates have dropped, you may be able to submit an application and get approved for a lower rate. You can stand a better chance of saving money on interest each month if you use an online lending platform like Upstart that considers other factors–such as education¹ and work history–when setting your refinancing loan terms. 

On the other hand, you may be able to work with your current lender or a new loan provider to negotiate a longer repayment period. 

Both options can lower your monthly payment without requiring months of on-time payments or a spotless credit report, but keep in mind that extending the repayment period could cost you. Getting a longer-term loan usually means you’ll pay more in interest, but if you really need to cut your monthly costs, it may be worth exploring. 

When is it a good idea to refinance your car loan?

Like any other major financial decision, it’s always a good idea to do your research and take some time to decide if car refinancing is right for you. Let’s take a look at some of the reasons you could be a prime candidate for refinancing. 

You’re not happy with your original car loan terms

Buyer’s regret is real, especially when it comes to a bad auto loan. Luckily, you’re not stuck with your loan forever. Maybe your situation has changed and you want to remove a co-signer. Maybe you’ve decided you want to pay the loan off faster and shorten the length of the loan. Or possibly you’ve been making timely car payments, raised your credit score, and are ready to refinance your vehicle with a low-interest loan. Bottom line, if you’re just not happy with it, it’s time for a change. 

Your financial circumstances have improved

When you applied for your original loan, your lender likely considered factors like your credit history, credit score, and debt-to-income ratio before setting your terms. If your financial situation has improved since then, it may be a good idea to check your rates again. 

In many cases, increasing your annual income or reducing your debt-to-income ratio can make it easier to qualify for a low-interest loan.

You’re having trouble making payments

If you’re having a hard time keeping up with your monthly expenses, refinancing your car loan could help. You don’t have to wait for a dramatic drop in interest rates to save on your auto loan, either. All it takes is a slight decrease to help you save more money every month by lowering your monthly car payment and reducing the amount you pay into your annual percentage rate (APR). 

Pro tip: Keep an eye out for potential rate changes and take some time to shop around before making a loan decision. You can often get a better offer by comparing rates from multiple lenders. 

Who shouldn’t refinance a car?

So far, we’ve talked a lot about who should refinance their cars. As a general rule of thumb, if you’ve owned your car for at least six months, made regular payments, and think you could get a better deal, refinancing could work for you. 

There is a flip side, though. We mentioned that refinancing isn’t for everybody, and that’s especially true if you’ve already repaid most of your loan. If you’re down to your final payments, it’s probably best to stick with your existing loan. 

In another scenario, if your car is older or has a lot of miles on it, you’re less likely to get approved for a refinancing loan. Some lenders won’t consider refinancing a car loan if the vehicle is over 10 years old. Others have a mileage cap, which means the lender won’t approve your loan if you’ve put more than 100,000 miles on your car. Upstart, however, offers refinancing on cars with up to 140,000 miles. 

It’s always a good idea to consider the potential fees you’d face if you refinance your car, too. Some loans come with prepayment penalties, or charges for repaying a loan early, that could counteract any potential savings. The same goes for loans with precomputed interest, or interest that’s calculated when you take out your loan instead of as you make payments. 

Lastly, think about your short-term financial goals. If you’re about to apply for another line of credit—such as a home mortgage or personal loan for a wedding—it’s probably best to stick with your current car loan. The dip in your credit score from refinancing could impact your chances of getting a good rate in the near future. 

What to consider before refinancing your car

You may be tempted to sign up for the first refinancing loan you find, especially if you’re sick of high monthly payments or inflated interest rates. Not so fast. Taking some time to consider these four important factors can set you up for long-term success and more savings: 

    1. Interest rates. You know how important it is to get a lower interest rate, so do your research before choosing a loan. If possible, check your rate and shop around for offers, too. Your numbers won’t be finalized until you move forward with an application, but you can get an idea of how much you’ll pay for a loan before going through a hard credit check.
    2. Potential fees. Virtually every loan comes with fees, ranging from origination fees to processing fees to late charges and more. Make sure you’re fully aware of the fees you could pay on both loans to determine if refinancing is actually worth it.
    3. Available loans. Depending on your needs, some loans may work better for you than others. For example, if you’re more interested in reducing your monthly payments, a long-term loan could be the best option.But if you’d prefer to pay off your loan faster, opting for a shorter-term loan with reduced interest rates and no prepayment penalty might be better.
    4. Your credit score. Refinancing your car could help you raise your credit score in the long run by making it easier to pay off your car and reduce your debt-to-income ratio. Still, refinancing a car loan could hurt your credit score at first.You already know you have to undergo a hard credit pull, which will knock your rating down a few points. At the same time, adding a new account to your credit report will reduce your average account age and negatively impact your score as well.

So, is it smart to refinance your car? It depends on the circumstances—and your lender

After you’ve given refinancing some thought and evaluated your own personal financial situation, you may be ready to take the next steps toward car refinancing. Just make sure you find a lender that works for you before getting started.

For example, online lending platforms like Upstart look beyond your credit score to determine your rate. That means you could get an affordable refinancing loan without a stellar credit score. As a result, you could pay less for your loan over time. You may even be able to pay off your car sooner than you thought. How’s that for a win-win? 

¹Neither Upstart nor its bank partners have a minimum educational attainment requirement in order to be eligible for a loan.

This content is general in nature and is provided for informational purposes only. Upstart is not a financial advisor and does not offer financial planning services. This content may contain references to products and services offered through Upstart’s credit marketplace.

About the Author

Upstart Content Team

The Upstart Content Team shares industry insights, practical tips, and borrower success stories to help people better understand the important “money moments” of their lives.

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