Advice

Refinancing a Car: Pros and Cons

By 10/21/2025 8:00am
Refinancing a car.

Quick Facts About Car Refinancing

  • With refinancing, a borrower might extend the loan length, reducing the monthly payment. A lower interest rate can also shrink the monthly bill.
  • Carefully weigh refinancing unless the goal is to shorten the term, as refinancing may result in paying more interest overall.
  • Refinancing carries with it the possibility of putting the borrower underwater if the loan term is extended.

If you are dissatisfied with the terms of your current car loan, refinancing is a potential pathway to lower monthly payments, a shorter loan length, or to address other issues. Although not as common as refinancing a mortgage, refinancing a car loan is an accepted tool when managing a household budget. However, with potential benefits come potential pitfalls. Let’s weigh some pros and cons of auto loan refinancing, as well as consider when it might be a good idea.

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Refinancing Pros

  • Lower interest rate: Over time, a lower interest rate (the money a lender charges a borrower for the loan) means you will pay less for that loan. Refinancing a car loan allows a borrower with an interest rate higher than today’s rate to take advantage of that lower rate and, thus, likely save some money. Note: Compare your current annual percentage rate (APR) to current offers from lenders. If you can lower the rate without extending the term, total interest usually falls.
  • More affordable payments: A borrower may be able to extend the loan length (term), which reduces the monthly payment.
  • Shortening the term length: You can reduce the term length through refinancing. Shortening the term often raises the monthly payment. You might need to bring extra cash if you’re underwater or need to meet loan-to-value caps.
  • Turn equity into cash: Depending on the size of the down payment, as well as the length of the current loan, the car will be worth more than the outstanding loan balance at some point. The difference is equity, or the car’s cash value. If the vehicle isn’t too old, refinancing is a way to access that cash, although doing so could extend the loan term and/or increase the monthly payments.

Refinancing Cons

  • More interest paid overall: Unless the goal is to shorten the length of a car loan, refinancing may result in paying more interest overall, even if the new loan’s interest rate is lower. This result could happen if refinancing extends the length of the loan.
  • Extra fees and charges: Although a lender may be willing to refinance a car, some costs above the interest rate might incur fees and charges. These could include charges for title transfer, application fee, and origination fee.
  • Potential for being underwater: A car loan is underwater when the owed balance is higher than the current book (market) value of the car, and that is a bad place to be. Refinancing can put the borrower underwater if they roll fees and negative equity into a new loan or stretch the term so depreciation outpaces the payoff.

When You Might Consider Refinancing

  • Improved credit score: A credit score is a snapshot of a borrower’s credit health at any given moment. If your credit score has improved by 100 points or more since the start date of your current car loan, investigating refinancing makes sense. Find out everything you need to know about credit scores with our article on Credit Score for Car Buying: Terms and Tips.
  • Better auto loan interest rates: Interest rates aren’t fixed. They can vary up and down over time. If they fall significantly (like from 10% to 5%, for example), refinancing could save some money.
  • Strained budget: Refinancing a car loan to reduce the monthly payment could provide some relief for a strained household budget. When faced with the possibility of a borrower defaulting on a loan, a lender may view refinancing as an acceptable remedy, even for a higher-risk borrower. Lenders may have hardship options, so contact them before you’re delinquent.

How to Refinance a Car Loan: 5 Steps

The experts at Experian know a lot about the mechanics of financing. After all, consumer credit is what they do. Here are Experian’s five steps for refinancing an auto loan, enhanced by our insights. Put your emphasis on Step 1. Just because you can refinance doesn’t mean you should.

1. Determine if Refinancing Is Right for You

Refinancing has sufficient cons that it may do your financial situation more harm than good. Therefore, look at refinancing from every angle so it benefits rather than hobbles your long-term financial health.

  • Status of your current loan: If the payoff amount is more than the book value, you are upside down (underwater). If you owe less than the car’s value, then the difference is the car’s equity, which can go toward a down payment on the refinancing. Although it’s not impossible to refinance if you are upside down, you will also be financing the difference between the car’s value and the loan’s payoff amount. Keep in mind, you can’t borrow your way out of debt. 
  • Check your credit score: We outline the ins and outs of credit scores in the aforementioned “Credit Score for Car Buying: Terms and Tips,” where you can see in much more detail how lenders apply credit scores to lending decisions. The takeaway here is that if your credit score falls below 601, refinancing will be challenging. Lenders set interest rates for nonprime/subprime credit scores substantially higher, around 18% to 20%. 
  • Early payoff penalties: Depending on the lender for your current financing, a penalty for paying off your loan early could lurk in that contract. If so, that penalty might outweigh any benefit you receive from refinancing. Compare that penalty against the financial gain of refinancing to determine if it’s still worth it. Prepayment penalties are uncommon, but check the contract.
  • Fees and charges: Before signing any refinancing agreement, have the lender spell out exactly what fees and charges will apply.
  • Loan length: Good for you if you are refinancing to reduce the number of months repayment will take. Shortening the term may also reduce the interest rate. However, beware any refinancing arrangement that adds months and overall interest to the repayment term.

2. Buff up Your Credit

As long as your credit score is in the high 600s or higher, you should be able to find a lender willing to refinance your car loan. However, if your credit score is lower, refinancing will be a tougher go. In this case, do whatever you can to rehabilitate your credit score. Here are a few suggestions to get your score moving in the right direction.

  • Obtain your credit reports: By law, each of the three major credit reporting organizations (Experian, Equifax, and TransUnion) must supply you with your credit report free of charge annually. Request a report from each, study them, and note any mistakes. Each bureau has a process for challenging information on your report. In turn, the bureau will reach out to the named creditor, investigate your claim, and delete the negative information if it finds in your favor. Repeat this process with each bureau separately. The bureaus offer free weekly online reports via AnnualCreditReport.com.
  • Pay off delinquent balances: You should pay off any delinquent balances or those in collection that you aren’t challenging. 
  • Don’t take on more credit: Adding new credit will further drag down your credit score.

RELATED: Can I Buy a Car With Poor Credit History?

3. Assemble Required Documentation

To apply for refinancing, you will need many of the same documents produced to secure the original loan. Here are some of what you might need.

  • Valid driver’s license
  • Proof of insurance
  • Proof of ongoing employment and current income (recent pay stubs)
  • Proof of address (electric, water, or gas bill showing your name and provided address)
  • Payoff document (with current payoff amount)
  • Vehicle registration 

4. Shop Around

The best path to getting a good refinancing deal is to shop around with several lenders. You might even consider joining a credit union while you’re at it. One goal is to get prequalified. This process isn’t the same as getting preapproved, which requires a full credit check. A prequalification isn’t binding, but it provides the lender’s estimate of the loan and terms if you went through the full process. Here are major factors to compare for any prequalifications you receive.

  • Interest rate: Ultimately, interest is your biggest real cost when financing. Generally, the lower the interest rate, the lower the cost of the loan.
  • Loan length: The interest cost is also a function of how many monthly payments (the loan term) it will take to repay the loan. The total interest paid during the loan should be noted in the paperwork. 
  • Monthly payment amount: Can you afford the monthly payments? 
  • Extra fees: In addition to the loan amount, a lender may charge origination fees, transfer fees, title fees, and other hidden costs.
  • Late-payment grace period: How many days past the contractual due date is a monthly payment considered delinquent? What is the late fee?
  • Prepayment penalty: If you pay off the loan early, will you be charged a penalty? If so, how much?

5. Apply

Once you pick from your prequalification offers, return to that lender and apply. Depending on your credit, the decision could be made while you wait or may require a day or two. 

When to Avoid Refinancing?

  • Higher interest rates: You may want to reconsider refinancing if today’s interest rates are measurably higher than the rate on your current car loan.
  • An older car: Lenders are leery of refinancing older cars. If your car is more than eight or 10 years old, finding a willing lender will be tough. Many lenders cap vehicles at 10 model years and/or 125,000 miles, but the criteria vary by lender.
  • Current loan underwater: If you owe more on a car than its current market value, refinancing will probably multiply that difference. Moreover, the lender may well require more money down.
  • Near the current loan’s term end: If within 12 months of paying off the loan, refinancing doesn’t make sense unless your goal is to cash out the equity.

Our Take

Situations exist when refinancing makes sense. For example, interest rates drop a point or two since your original loan, or your credit score has improved significantly (75 to 100 points or more). Also, if your monthly budget has tightened and a lower monthly payment would relieve the pressure, it might make sense to extend the terms by a year or two, despite the additional interest cost, the lesser evil. However, we’ll say it again: You can’t borrow your way out of debt.