When Should You Refinance Your Car Loan? And When To Wait

It makes sense to consider refinancing your auto loan if you can lower your interest rate and monthly payment. The refinancing process involves swapping your current loan for a new loan with different — and ideally better — terms.

However, refinancing is not always a wise financial move. If interest rates are high, or if you’re close to paying off your loan, then it may make more sense to stick with your current lender. Knowing the ins and outs of when to refinance and when to wait will help you make the best decision for refinancing your auto loan.

When should you refinance your car loan?

There are multiple benefits to refinancing and quite a few situations where refinancing makes the most sense. In general, the best time to refinance your auto loan is when you can reduce the interest rate, but even just lowering your monthly payment can add much-needed room to your budget.

When you can get a lower rate

Refinancing is a good move when rates are low. Auto loan refinancing rates tend to match used vehicle rates, which currently average 11.87 percent, according to Experian data. However, Bankrate’s data shows that the auto loan rates for a 48-month used car loan haven’t changed significantly in months. If you borrowed your loan when rates were high, like in 2022, you could benefit from an auto loan refinance now that they are holding steady between 7.6 percent and 7.7 percent.

Assuming a remaining loan balance of $10,000 and a term of four years, this is how refinancing from a 15 percent APR to a 7 percent APR can affect your overall costs:

Your total savings would be about $39 a month — but you would reduce the total interest you pay by $1,865.

When your credit score and DTI have improved

Improving your credit score may be enough to get a lower rate. The difference between applying for a loan with good credit and applying with bad credit is significant. For many auto loans, it can mean an APR that is more than 10 percentage points lower. That could mean major savings on your monthly payment and total interest costs.

Even if market rates haven’t changed much since you first borrowed, refinancing with a better credit score can lead to savings on your auto loan.

When you received your initial loan from the dealer

Dealer financing takes many forms. Often, it is either captive financing, which is offered through a sister company to the auto manufacturer, or a third-party financing company that works with dealerships.

In the first quarter of 2025, captive financing companies and buy here, pay here dealerships accounted for nearly 23 percent of all used car loan financing, based on data from Experian.

Because dealers tend to offer loans at a markup to make a profit, you may have a much higher rate than you would if you’d shopped at a bank or credit union. Refinancing with a different lender could help you secure a lower, more competitive rate.

When you’re struggling to keep up with payments

If your income has dropped or your expenses have increased since you took out your auto loan, it may be time to explore refinancing. You may be able to get a more affordable car payment by extending your loan term — even without a lower interest rate. Many lenders offer terms as long as 84 months, which could save you money in your monthly budget.

One warning: You’ll typically pay more total interest if you extend your term. Refinancing to a longer term can be a good short-term solution, but consider making principal-only payments to reduce your overall cost.

When you have positive equity in your car

Lenders view positive equity as a big plus when refinancing. The bigger the difference between what you owe and your car’s worth, the more the lender stands to make if you default on your loan. Since the lender takes less risk, you may get a lower interest rate.

You can estimate your car’s value on websites like Edmunds or Kelley Blue Book. Once you have an estimate, divide the number by your outstanding balance to determine if you have positive equity.

For example, if your car’s value is $20,000 and your remaining balance is $15,000, your loan-to-value ratio is 75 percent. That means you have 25 percent equity in your car.

When should you avoid refinancing your car

Refinancing a car loan isn’t always the right choice, especially if it won’t improve your financial situation — or may even worsen it. In this case, refinancing and paying off your car loan early may not be the best decision.

When you’re close to paying off your loan

If you are nearing the end of your loan term, refinancing may not save you money. Instead, you should stick with it unless you desperately need to extend your loan term to reduce your monthly payment.

In addition, most lenders have a minimum loan term of 24 or 36 months. If you have less than that remaining on your car loan, you may have to extend your term. While a longer loan term will mean a lower monthly payment, you will also pay more interest.

Your remaining loan balance also matters. Lenders set a minimum balance for refinancing, typically between $3,000 and $7,500. If you owe less than the lender’s minimum balance, it is unlikely that you will qualify. And while cash-out refinancing does exist, it can be hard to find a lender that offers it.

When your auto loan is new — or old

Most lenders require you to have your current auto loan for at least six months before yo can be approved for refinancing. A solid payment history shows potential lenders that you are a low lending risk.

Similarly, most lenders require that you have at least a year left on your loan. This typically gives a lender enough time to earn interest off your loan. It also prevents you from over-borrowing. Lenders rarely offer terms of less than two years, and opting to refinance when you only have a few months left on your current loan will lead to paying more than necessary in interest.

When you owe more than the car is worth

Because cars depreciate over time, the longer you have an auto loan, the more likely you are to owe more on the car than it is worth. This is also called being underwater or upside down on a car loan — and it will make it hard to refinance. Lenders know they won’t be able to recoup the loan’s full amount if you default while upside-down, so they generally won’t extend any new credit secured by the car.

This is the opposite of having positive equity in your car. So while you may be able to refinance, you should determine if it will actually save you money. If it won’t — or you just break even — refinancing may not be your best option.

When interest rates are rising

If you took out your auto loan when rates were low, it may be difficult to find a better rate. In fact, you may pay more if you refinance in a market where interest rates are on the rise. The recent leveling off of inflation has the potential for lower auto loan rates in the future, although some experts suggest the Trump administration’s tariffs could increase inflation.

However, if you’re struggling to make payments because of the short repayment term you chose, a car refinance may still make sense. If you have to choose between missing a payment and extending your loan term at a higher rate, choosing the longer-term refinance could save your credit score and prevent a future car repossession.

When you don’t meet the lender’s requirements

Lenders determine eligibility based on similar criteria, but each has its own standards. Before you start, check the auto loan refinancing requirements for you, your vehicle and your current loan.

• A regular source of income, a low debt-to-income ratio and good credit.
• Proof of residence, such as a lease agreement, mortgage statement or utility bill.
• Your car’s make, model, year, vehicle identification number (VIN) and mileage to evaluate your car’s worth.
• Your loan’s current balance, monthly payment and payoff amount to determine if you meet its minimum loan requirements.

Most lenders will not consider refinancing unless your car is less than 10 years old. Your mileage should also not exceed 100,000 or 150,000 miles, depending on the lender.

When fees outweigh your savings

Before refinancing, consider whether fees will impact your overall savings. If your auto loan has a prepayment penalty, paying off your loan early can cost you. You will need to weigh the amount you save in interest over the cost of the prepayment penalty to determine if refinancing will actually save money.

Watch out for other fees charged by both your old and new lender. Transaction fees, administrative fees or processing costs may reduce the benefit of refinancing. You may be able to negotiate these fees, but there are also some states that will charge you state registration and title transfer fees for re-registering your car after refinancing.

Is now a good time to refinance your car?

Current auto loan refinance rates are high, but if you purchased a car before the Fed’s rate cuts, then you might find a more favorable rate now. Tariffs are another factor that could affect refinancing. If tariffs increase prices enough, inflation could lead the Fed to raise rates, indirectly raising refinance rates. On the other hand, tariffs might lead to a shortage of vehicles in the market, increasing the value of used cars. As the value of used cars rises, lenders might offer more favorable refinance rates.

Your best bet is to keep track of auto loan refinance rates on a regular basis and take extra steps to boost your credit, like keeping your credit card balances low or paying them off, so you’re ready when rates drop. Your financial situation should determine when you’re ready to refinance — ideally, it should be after you have improved your credit and while average rates are on the decline.

Alternatives to refinancing

If you want to lower your car payment without refinancing, you still have options.

• Request loan modification. If you’re behind on payment, ask your lender about a car loan modification. You may be able to extend your term or reduce your rate when facing short-term financial problems.
• Swap to a less expensive vehicle. This can be done either by trading in your car for a less expensive model or selling your car privately and buying a less expensive vehicle.
• Consider a lease. Switching over to a car lease could also help you save on monthly payments, but it may cost more over the long term.
• Pay your loan off with a personal loan. If your car is too old for refinancing, consider a personal loan. Since these loans are often unsecured, they don’t require any vetting by the lender, and many lenders are able to approve loans within a day of applying.

Bottom line

The primary reason to consider refinancing is to lower your rate or monthly payment. Try to apply the savings to your balance for an even faster pay off.

Get the refinancing process started by checking your credit score and prequalifying with at least three lenders to see what interest rates you qualify for without hurting your credit score. Crunch the numbers to be sure refinancing is aligned with your overall financial goals.