Car loan refinance
Refinancing your car loan means replacing it with a new loan, usually from a different lender. This page explains what that means, when it helps, and how to evaluate whether it makes sense for your situation.
What is car loan refinancing?
When you refinance a car loan, a new lender pays off your existing loan, and you start making payments on the new loan terms. The new loan has its own APR, term length, and fees. Your goal is usually to get better terms: a lower APR, lower payment, or lower total cost.
Refinancing is different from modifying your existing loan with your current lender. Most lenders don't offer true refinancing—they may offer loan modifications, but those are different products with different rules.
When does refinancing help?
Refinancing can help if you can achieve one or more of these outcomes:
- Lower APR: A meaningful drop (often 2% or more) can reduce total interest paid.
- Lower monthly payment: Useful if payment pressure is a problem, but only if it doesn't come from extending the term too much.
- Lower total remaining cost: The amount you'll pay from today to payoff goes down.
The key is comparing all of these, not just one. A lower payment that comes from a longer term can increase total cost, which may not be worth it.
What to compare
When evaluating a refinance offer, compare these four things:
- Monthly payment: Does it go down? By how much? This affects your monthly cash flow.
- Total remaining cost: How much will you pay from today until the loan is paid off? This is the long-run cost.
- Break-even timing: How long until the monthly savings have paid back the upfront fees? If break-even is far out, the refinance may not help soon.
- Term length: How long will you be making payments? A longer term can reduce payment but increase total cost.
Common refinance requirements
Most lenders have requirements that can limit your refinance options:
- Vehicle age: Many lenders won't refinance vehicles older than 10 years.
- Loan-to-value (LTV): The loan amount relative to the vehicle's value. High LTV (over 100% means negative equity) can limit options.
- Loan age: Some lenders require the loan to be at least 6–12 months old.
- Credit score: Better credit usually means better rates, but some lenders work with lower scores.
The term extension trap
A common mistake is focusing only on monthly payment. If your payment goes down but your term extends significantly, you might pay more in total interest over time. For example, reducing payment by $50 but extending the term by 24 months could increase total cost.
Always check total remaining cost, not just payment. If total cost goes up, the refinance may not be worth it unless payment pressure is your primary concern.