Is Now a Good Time to Refinance My Car?
Determine if refinancing your car loan makes financial sense for you right now. Understand key factors and the steps involved.
Car refinancing involves replacing your current car loan with a new one, often with different terms. Evaluating if now is an opportune moment to refinance your car depends on several individual factors. This article will guide you through understanding car refinancing and its potential benefits.
Understanding Car Refinancing
Refinancing a car loan means securing a new loan to pay off your existing auto loan. Once approved, it replaces your original financing, and you begin making payments to the new lender. This process aims to achieve more favorable terms than your initial loan agreement.
The primary objectives for car refinancing include obtaining a lower interest rate, which can reduce the total interest paid over the loan’s life. Another goal is to decrease monthly payments, providing more budget flexibility. Refinancing also offers the possibility to adjust the loan term, either by extending it for lower payments or shortening it to pay off the vehicle faster, saving on interest.
Key Factors to Evaluate
Evaluating whether refinancing is beneficial involves several financial indicators. Your current interest rate plays a significant role, as prevailing market rates might be lower than what you initially secured. For example, in July 2025, average new car loan interest rates were around 7% APR, while used car rates were about 10.9% APR, according to Edmunds. If your existing rate is higher than current averages for your credit profile, refinancing could lead to savings.
Your credit score is another important factor, as an improved score since your original loan can qualify you for better interest rates. Lenders use your credit score to gauge repayment risk; a higher score translates to a lower interest rate. For instance, in the first quarter of 2025, individuals with “superprime” credit (781-850) saw average new car APRs of 5.18%, while those with “subprime” credit (501-600) faced average rates of 13.22%. Consistently making on-time payments on your current loan can help improve your credit score, potentially leading to more favorable refinancing offers.
The value and age of your vehicle also influence refinancing eligibility and terms. Cars depreciate rapidly, losing approximately 20% of their value in the first year and an average of 15% to 25% annually for the next four years. This depreciation impacts your loan-to-value (LTV) ratio, which compares your loan balance to the car’s market value. A lower LTV, ideally 100% or less, means you have positive equity and is preferred by lenders, although some may approve refinancing with LTVs up to 120-125%. Many lenders may not refinance cars older than seven years or with mileage exceeding 90,000 to 125,000 miles.
Consider your current loan terms, including the remaining balance and months left to repay. Some lenders have requirements for how long your loan must have been open or how many months must remain to qualify for refinancing. Check for any prepayment penalties on your existing loan, as these fees could offset savings from refinancing. Your personal financial situation, including job stability and other debt obligations, can also affect your ability to secure a new loan with better terms, as lenders assess your capacity to manage payments.
The Refinancing Application Process
If car refinancing aligns with your financial goals, the application process involves several steps. You will need to gather various documents to support your application. Required items include your driver’s license, vehicle registration, proof of insurance, and the vehicle identification number (VIN). Lenders will also request proof of income, such as recent pay stubs or tax returns, and your Social Security number.
With your documents in order, shop for lenders. Numerous financial institutions, including banks, credit unions, and online lenders, offer auto refinancing. Compare offers from multiple lenders, paying close attention to interest rates, loan terms, and any associated fees. Many lenders provide a pre-qualification option, which involves a soft credit check that does not impact your credit score and can give you an estimate of potential rates.
After comparing offers, submit a formal application to your chosen lender. This involves a hard credit inquiry, which may cause a temporary, slight dip in your credit score. The lender will then proceed with underwriting to determine final approval and specific loan terms. Upon approval, review the new loan offer, ensuring all terms, including the annual percentage rate (APR) and monthly payment, meet your expectations.
If you accept the offer, sign the new loan documents. The new lender will pay off your old loan, transferring the debt. The car’s title will also be transferred to reflect the new lienholder. You will then begin making payments to your new lender according to the agreed-upon terms.