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Key takeaways
- Refinancing does not require a down payment, but you may be required to pay fees like prepayment penalties or transaction fees.
- If you want to refinance a loan, you’ll need equity in the car, a stable or better credit score and a current loan that fits lender refinancing requirements.
- If you choose a longer loan term when refinancing, it may cost more in interest over time.
Refinancing your car loan can save you money if you qualify for a new loan with a lower rate. You can also lower your monthly payment with refinancing — but that can mean paying more in interest, depending on the loan term you choose.
And while you won’t need a down payment to refinance a car loan, you may need to pay some fees associated with closing your current loan early or initiating a new loan. Before getting started, it’s important to consider the pros and cons of refinancing your auto loan.
Do you have to pay to refinance a car?
While refinancing an auto loan can save you money over time, doing so can sometimes cost the borrower more money than it will save.
You also want to look closely at the prepayment clause of your current loan. A prepayment penalty is a fee you’ll be charged for paying off the loan early or even making extra payments. If your lender charges you a prepayment penalty that exceeds your potential savings, staying put may be better than refinancing.
Other fees you might incur include:
- Transaction fees: Your new lender may charge fees related to processing your application. Ask about waiving them.
- Title transfer fee: Depending on your state of residence, you may incur a fee when you transfer your title from your old lender to the new one.
- Registration fee: If your state requires you to re-register your car after refinancing, you may have to pay this fee.
Additionally, you may not qualify for a lower rate than you currently have. If rates have risen overall or your credit has not substantially improved, the refinancing terms you’re offered may not be an improvement over your current ones. Be prepared to remain in your current loan.
What you’ll need to refinance a car loan
Refinancing a car loan is not quite like taking out a loan to purchase a new car. Lenders will likely want to see that the vehicle has low mileage, positive equity and isn’t too old. They will also want you to meet credit and income requirements. When you’re ready to get started, compare each lender’s eligibility criteria to confirm you qualify.
Positive equity
First and foremost, you will need equity in your vehicle before you can consider refinancing. You’ll need to owe less on your loan than the vehicle’s current value.
Be mindful that if you owe a figure close to the vehicle’s value, you could become underwater on your new loan– a situation that can complicate your finances if you try to sell or if the vehicle is totaled.
Good credit
If your credit score has stabilized or gone up since you borrowed your existing loan, you may see a benefit in refinancing. Your credit score significantly influences your interest rate. A higher credit score can mean a much lower interest rate on auto loans and other forms of credit.
An awareness of average car loan rates and the prime rate is also helpful when considering refinancing. Even if your credit score has not changed, market conditions may have decreased rates overall since you borrowed your current loan.
Minimum refinancing requirements
Not every auto loan can be refinanced. Your vehicle and the current loan must meet certain eligibility requirements. You’ll need a record of on-time payments and a car that is neither too old nor too heavily used (fewer than 10 years and under 100,000 or 150,000 miles are good rules of thumb).
It’s important to note that a refinancer going up to 150,000 miles is fairly rare — lenders like RefiJet and Autopay are the exception, not the norm.
In addition, to make a refinance worth the lender’s cost and effort, they usually require you to have a minimum amount of money and time left on the loan. For example, if you only have six months’ worth of payments, you may not see a return by refinancing the loan. That minimum will vary from lender to lender.
Alternatives to refinancing
Refinancing is one of many ways to lower your car payment, and it may not be right for everyone. Some of the refinancing alternatives to explore include:
- Loan modification. You can contact your lender and ask to change the terms of your loan. If you’re experiencing short-term financial problems, this can be a good alternative to refinancing.
- Swap to a less expensive vehicle. If you initially took out a large loan, trading in and choosing a less expensive vehicle can effectively lower your monthly payments and long-term costs.
- Sell your car privately. Similar to trading in, you can also sell to a private buyer. This may involve slightly more work, but it could net you more money.
- Choose a lease. If you want the latest technology and newest features of a new car, leasing may be a good route. However, it is generally more expensive than buying — even if the monthly payments tend to be lower.
Bottom line
In some cases, refinancing your auto loan can save you money, but it may not be the most cost-effective option for everyone. Carefully review the new interest rate and loan term, as well as any fees the lender charges, to determine whether it’s a step that will truly benefit your budget and financial goals. If you struggle to make your monthly payments, consider alternatives and run the numbers carefully before refinancing.
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