Debt Consolidation / Auto Loan Refinancing

How Does Auto Loan Refinancing Work?

Written by Ascend Team
Updated Nov 13th, 2023
The information provided in this article does not, and is not intended to, constitute legal or financial advice; instead, all information, content, and materials available in this article are for general informational purposes only. 

Having a high monthly car payment can cut into your budget, so refinancing is a smart way to help lower this expensive recurring cost. One report revealed that Americans saved an average of $990 a year after refinancing their car in 2020, the largest amount since 2016.

Refinancing may help create more wiggle room in your monthly budget, allowing you to use that cash towards paying off higher-interest debt, such as credit cards or save more in an emergency fund. 

Refinancing your auto loan is a pretty straightforward process that isn’t as lengthy of a process as refinancing your mortgage, for example. 

If you’ve considered refinancing your car, be sure to understand exactly what it entails so you know what to expect and how much you’ll need to pay in the process. 

Here’s what you need to know.

Reasons to refinance your car

Cost savings is a popular reason why many car owners choose to refinance. Generally speaking, the purpose of auto refinancing is to lower your monthly payments by securing a better interest rate, terms of the loan, or make changes to who is listed on the loan, such as a co-signer. 

When you refinance your car, you’re essentially closing out your old loan and taking out an entirely new loan. When you take out a loan to replace your current one, your new loan pays off the existing one. You’ll receive new terms for the new loan as well as your interest rate

It’s common for borrowers to choose to refinance from a brand new lender. The refinance process is similar to taking out a new loan. It’s important to shop around for competitive rates from lenders before you fill out an application. 

If you are able to refinance your vehicle, you may be able to avoid a non-voluntary or voluntary repossession.

What are the qualifications for an auto refinance loan?

In order to qualify for a refinance, your credit score must be in good standing. If your score needs improvement, it might be a good idea to take some time to increase your score before you start the refinance process.

Give yourself three to six months and make it a point to pay your bills on time and try to knock out high-interest debt you might have, such as credit cards. You may be able to keep your car if you file for bankruptcy, but loans after bankruptcy may be another get another car loan immediately after. Also, you may not be eligible for an auto loan refinance if you recently filed for bankruptcy.

How auto loan refinance affects your credit

When you apply for a new loan with a bank or lender, a hard pull is made on your credit. This means the lender goes to any of the three credit bureaus and makes a hard inquiry. This may cause a temporary dip in your score. 

This shouldn’t be cause for concern. Your score will eventually go up, especially if you’re making on-time payments for your other bills. Once you start making regular payments for the new loan, you should see your score will recover. 

It’s important not to apply for new credit at this time, such as credit cards, which may cause a further dip in your score.

Beyond the refinance, it’s a good idea to monitor your credit score regularly through your bank or other financial institutions that may offer a monthly score for you for free. You can also check your credit report once a week from all three credit bureaus from (Normally, you’re entitled to one credit report per year from each of the bureaus but due to the pandemic, they are continuing to offer reports once a week.) 

When it makes sense to refinance

Depending on your situation, such as how much you owe on the loan and your interest rate, it may or may not make sense for you to refinance. The key is to get educated so you understand this and whether it’s a good idea for you to move forward. 

Typically, it makes sense to refinance if you still have a good chunk of your loan to pay off and your car is relatively new. If you fall into this camp, it may benefit you to refinance. Here are additional reasons why car owners choose to refinance:

1. Credit improvement: If your credit score has gone up, you may now qualify for a better rate, which will help lower your monthly payment. 

2. Extend the loan term: This is the length of time it will take you to pay back the loan. By extending the terms of the loan, your monthly payments will be lower, which provides more wiggle room in your monthly budget. Keep in mind that if you extend the terms of your loan, your payments may be lower each month, but it may cost you more overall. 

3. Lower your interest rate: At the time of vehicle purchase, you may have secured a higher interest rate but noticed rates decreased. This is a great reason and opportunity to refinance and secure a lower interest rate. Even reducing your interest rate a few percentage points will equate to a decent amount of savings over time. 

4. Remove or add someone as a co-signer: Perhaps you needed a co-signer when you first purchased your car but have improved your credit since that time. You may want to remove the co-signer from your loan through refinancing. This is made possible from the new loan and contract.

What are the pros and cons of an auto refinance?

Weigh the pros and cons of refinancing your loan, and do the calculations to make sure the overall cost of your loan and additional fees won’t cut into your goal to save money. 

An auto refinance loan won’t always benefit everyone, so here are a few considerations to make when weighing your decision of whether to move forward or not. 


  • Saves you money: Securing a lower interest rate can help make your car less expensive over the life of the loan.
  • Gives you peace of mind: Having a smaller monthly payment may provide you with more wiggle room to pay down other debts or save for a rainy day.
  • Simplicity: Refinancing is a fairly straightforward process.


  • Fees: This may include re-registering your loan with your state and transferring your lien.
  • Restrictions: When you shop around for rates and lenders, find out if there are any specific lender rules. For example, some banks may not refinance if your vehicle is more than 10 years old or has too many miles on it. 
  • Can cause a dip in your credit score: A new loan means a hard credit pull is required. This causes a temporary dip in your credit score. Try not to apply for any more credit at this time. 

When to avoid a refinance

There are situations when a refinance simply doesn’t make sense. If you’re in any of the following scenarios, you may want to hold off on refinancing. 

  • You’re almost done paying off your loan: Loans often calculate more of the interest in the beginning, so the longer you wait, the less it makes sense to refinance.
  • Your car is old: Some banks won’t refinance cars that are more than seven years old or have more than 90,000 miles on it. However, it depends on the lender, as they may assess your situation on a case-by-case basis. Chase, for example, refinances loans on cars more than a decade old. 
  • The fees outweigh the refinance advantages: It costs money to refinance, and depending on your lender, you may be charged a prepayment penalty for paying your current loan off early, for example. Although these fees are usually reasonable, you may also need to pay for loan origination fees, lien holder and state re-registration fees. 

How to refinance your car

Here are the steps you should prepare for when you are ready to refinance your car. 

1. Check your credit: Remember, a refinance is taking out an entirely new loan, so your credit needs to be in solid shape. If it’s not, you likely won’t qualify for a lower interest rate, which defeats the entire purpose of the refinance. 

2. Gather documents such as:

  • A copy of your driver’s license
  • Vehicle registration
  • Your income statements from work
  • Proof of your residence
  • Payoff statement from your current lender

3. Apply for the loan: You’ll need to submit an application online and share your financial information. Your application is then reviewed in order to determine whether or not you qualify. 

4. Review the documents: If you are approved, your lender will send you a contract to sign. 

5. Your loan is funded: Your new lender pays off your existing loan and will let you know when you can start making payments on the new loan. 

Bottom line

Think about where you are with your loan. A good rule of thumb is to recognize that the interest is typically paid at the beginning of the loan (also called the front end) and the principal is paid on the back end. Therefore, if you’ve already paid off most of the loan, it would not make sense for you to refinance. 

However, if you still have a good portion of the loan to repay and want to pursue a lower interest rate, refinancing is a great way to help you save money over the life of your loan while lowering your monthly payments. 

Don’t forget to shop around for the most competitive rate. 

Kim Tran is the Social Media and Content Manager at Upstart. Upstart is a leading AI lending platform partnering with banks to expand access to affordable credit by enabling effortless credit based on true risk.