When you refinance a loan, you and the loan holder—often a dealership, but sometimes a bank or other financial institution—renegotiate the terms of your original loan. Refinancing can help you get better terms, like a lower interest rate or extended payoff period.
Auto loans are secured. This means that your assets can be seized as collateral if you stop making your payments. But it also means that you can typically get lower interest rates.
Your credit score has a pretty big impact on the loan terms that you’re eligible for. If you’ve improved your credit score since you first got the loan, you may want to consider refinancing for a better interest rate.
You can refinance your auto loan through a bank, a refinance broker, or an affiliate lender. Each has its own benefits and drawbacks.
Banks usually offer good rates, but they’re less open to negotiation.
Refinance brokers aren’t associated with a specific institution and work on your behalf to compare different lenders and find you the best rate.
Affiliate lenders (like car dealerships) have special deals with institutions to offer attractive rates, then the leaders buy your loan and become the true lienholders.
Affiliate websites make money by finding you through Google and selling your contact information to lenders. You won’t get the best rates through affiliates, and you’re likely to be hounded by texts and emails.
Best lenders for refinancing your auto loan
There’s really only one way to make sure you’re getting the best possible rate when you refinance your loan: comparison shopping. And when you do it, you’ll want to look at a few key factors:
APR (interest rate)
Good lenders have low admin fees and offer repayment terms that work for your budget and timeline.
Since most lenders post generic loan details on their websites, the only way to know what you qualify for is to submit your personal information.
Key Takeaway Refinancing can save you money and makes sense if you’ve improved your credit score since you originally took out the loan.
How does auto refinancing work?
If you’re wondering what the process of auto loan refinancing looks like, you’re in luck. Here’s an overview of each step.
1. Assemble your documentation
Gather the following documents:
Original loan contract
Social security number
Vehicle identification number (VIN)
Proof of employment
Check your contract to ensure that you won’t get hit with penalties for early repayment.
2. Assess your credit
You can pull your own credit score to see if you might qualify for better loan terms. While you can wait for the lender to pull your score, knowing it in advance puts you in a more powerful negotiating position.
3. Compare rates and submit your application
You can call around to compare loan terms—but who has the time (or patience) for that? To easily compare multiple rates from top lenders, use Jerry.
Jerry does all the digital research for you. No uncomfortable phone calls, no emails, just savings and an awesome new rate on your auto loan!
Key Takeaway To refinance your loan, you’ll need to gather your documents, assess your credit rating, and then compare rates to find the most favorable terms for you.
Who qualifies for an auto loan refinance?
You’re a good candidate for refinancing your auto loan if…
Your credit score has improved. If you have better credit now than you did when you got the loan, a refinance could get you a lower interest rate.
Interest rates have gone down. Interest rates fluctuate. If you see other lenders offering better rates than the one on your contract, it might be worth it to look at refinancing.
Your income has increased. Now that you’re earning more money, perhaps you’d like to pay off your loan faster than your original repayment schedule. That means refinancing.
Your income has decreased. If you’re earning less and you need to reduce your payment amount, refinancing can help you achieve affordable monthly payments.
You financed your car through the dealership. Dealerships don’t always offer the best rates. If your original loan was made through a dealership, refinancing with a bank could get you a better rate.
It’s been 2+ years since you bought the car. Some loans have a waiting period of 24 months before refinancing is allowed. If you’re past this period, seize the moment and find a better rate!
You’re not planning any major purchases in the near future. Refinancing can have a small impact on your credit score. But if you’re not planning to apply for a mortgage anytime soon, this shouldn’t affect you too much.
The benefits of refinancing outweigh the fees. Some contracts have penalties for early repayment. But if the long-term benefits of refinancing outweigh the fees you’ll pay, you may want to consider it.
You didn’t shop around last time. If you took the first deal that was offered to you, you’re almost definitely missing out on savings. Refinancing your loan could score you a much better deal.
Key Takeaway If you have good credit and won’t be hit with hefty fees for early repayment of your original loan, refinancing might be worth it.
Can you refinance your car loan if you have bad credit?
If you have a less-than-ideal credit score, you can still refinance your car loan—but be prepared for rates that are higher than average.
Here are some tips to help you find the best loan terms with poor credit:
Save up a large down payment. Not only does this tend to lower your monthly payment amount, but it could help you qualify for a lower interest rate, too.
Get someone to cosign. Cosigners share responsibility for the loan with you. See if a family member with better credit is willing to cosign and help you qualify for a better rate.
Improve your credit score. This is not an instant fix, but it might happen faster than you think. Pay down as much debt as possible and don’t open any new credit lines. This could boost your credit score and help you nab a better rate when refinancing.
How much does a car loan cost—and how much can you save by refinancing?
APR rates can vary widely, ranging from about 3% to 18%. There are a number of different factors that affect your rate:
Your credit score
Size of your down payment
Your negotiation skills
A poor interest rate can really add up over the long term—and refinancing can save you hundreds, if not thousands of dollars.
Here’s how each factor might affect the cost of your car loan.
Typical rates by credit score
Generally speaking, your credit score is the factor that has the biggest influence on your rates.
Credit scores between 781 and 850
This is considered “super prime” credit. With these credit scores, you’ll be eligible for some of the lowest rates around—often 1% to 2%. Credit unions usually offer the best rates for people with high credit scores.
With scores like this, you can demand that the car dealership allow you to finance your auto loan through a credit union.
Credit scores between 661 and 780
If you have a “prime” credit score, you’ll likely work with a commercial bank to refinance your loan. Banks understand the loan process and often pay referral fees to dealers to get business.
The rates with commercial banks aren’t quite as good as those with credit unions, but they’re still pretty low—between 2% and 10%.
Credit scores between 601 and 660
A credit score in this range is “fair” and will get you an APR of around 15% to 18%.
Banks need to trust that you can handle the amount of the loan and make your monthly payments on time. Your credit history may make lenders wary of extending a loan.
Credit scores between 501 and 600
These are “subprime” credit scores and lenders may be hesitant to work with you. You might fall into one of two categories here: behaviorally subprime or situationally subprime.
Behaviorally subprime borrowers have missed payments due to low financial literacy
Situationally subprime borrowers have emergency debt that couldn’t be paid off
If you have a subprime credit score, don’t lose hope—some lenders specialize in helping subprime borrowers.
Here’s a summary of average APRs based on credit rating.
Average Annual Interest Rate
Key Takeaway A high credit score will net you the best rates and give you options, like taking out a larger loan or paying less each month.
Typical rates by car type
If you’re buying an expensive vehicle, it can be tempting to choose a longer loan term—it allows you to keep your monthly payments low and spread out the repayment period. But big loans and longer loan terms mean higher interest rates.
Believe it or not, the car make does have an impact on the APR you’ll receive. And used cars tend to get better rates than new ones—so consider a new-to-you car and you’ll find savings all around!
Here are the average interest rates for some common makes.
Loan terms vary from 24 months to 84 months (that’s 7 years!)—and the length of your loan term significantly affects the overall cost of your loan.
The average length of an auto loan is 63 months, or just over 5 years. But longer terms are becoming more common as people choose lower payments over a longer period.
Choosing a shorter-term contract usually gets you a lower interest but higher monthly payments. Lenders expect that your circumstances won’t change substantially and you’ll be able to continue making payments.
Longer-term contracts typically come with a higher APR, and that means potentially huge interest costs. This could put you in the unenviable position of owing more on your loan than your car is worth—colloquially known as being upside-down.
Here are some examples of loan terms and interest rates for people with great credit.
Average Annual Interest Rate
Key Takeaway Shorter loan terms mean higher monthly payments, but you’ll usually get better interest rates and a lower overall loan cost.
Compare auto insurance policies
No spam or unwanted phone calls · No long forms · No fees, ever
Any type of refinancing might affect your credit because the lender has to do a credit check.
During negotiations for refinancing, the lender will need to pull your credit—and a hard inquiry like this can cause a small dip in your score. If you accept a loan offer, your credit score may dip again for a short period.
Why? It’s all based on statistics. Studies show that when borrowers take on new debt, they’re at the greatest risk of missing payments. As long as you maintain steady payments for several months, your score should return to normal (or even improve!).
It’s true that both your original loan and the new, refinanced loan will show up on your credit report—but there’s no need to worry about it.
Refinancing is the process of replacing an existing loan with a new one. The amounts will be roughly the same, so refinancing a car loan won’t affect your credit score too much over the long term.
Once you finalize your refinancing agreement, your old loan will be closed and marked “in good standing” on your credit report. Your new loan will also be entered into your credit report so that payments can be tracked.
Key Takeaway Any dip in your credit score during the loan refinancing process should be minor and temporary, as long as you keep up your monthly payments.
FAQs & related articles
Can I refinance if I’m upside-down on my car loan?
If you’re upside-down on your loan, you owe more than your car is worth. But if you have good credit and your car is worth enough to serve as collateral to secure the loan, you might be able to refinance.
How does cash back work with refinancing an auto loan?
Borrowers with good credit are sometimes eligible for cash back. Essentially, this means refinancing your loan for more than your original loan and getting the difference back in cash.
Jerry is your one-stop shop for auto loan refinancing. Download Jerry and see whether you could qualify for cash back.
Do I need cash to refinance?
Most loans don’t have a prepayment penalty or origination fee. Depending on your state, you may need to pay a fee to change the official lienholder on your vehicle title (from the original lender to the one you refinanced with). If there’s a cost, it’s typically under $100.
Can I sell my car with an outstanding loan?
Yes. If your car is worth less than what you owe, you may have to pay the difference yourself before selling the vehicle. Another option is to refinance the loan to get your numbers where you need them to be.