Refinancing Your Car Loan: Do the Math First

How refinancing a car loan works

You apply to a new lender, usually a bank, credit union or online lender, with your car's VIN, mileage and a payoff quote from your current lender. If approved, the new lender sends the payoff amount directly to the old lender, and you start making payments on the new loan, at its rate and for its term. Nothing changes about the car, your insurance or your registration except the name of the lienholder.

Because the car is the collateral, the lender looks at it as well as at you. Many lenders limit how old the car can be, how many miles it has and how much you can borrow against its value. If you owe much more than the car is worth, approval is harder and the rate is higher.

When refinancing saves money

Timing matters too. Interest is front-loaded: early payments go mostly to interest, later ones mostly to principal. Refinancing in the first year or two saves far more than refinancing with a year left. In Experian's data, refinanced loans were about 26 months old.

The math: $22,000 left, three choices

Say you owe $22,000 at 11% with 48 months to go. A lender offers 7.5%. Here is what each choice costs from today on, before any fees:

Keeping the same 48 months saves about $37 a month and $1,760 in interest. Stretching to 72 months cuts the payment by $188, but you pay about $95 more interest than if you'd done nothing, and you make payments for two extra years on a car that keeps losing value. Run your own numbers in the loan payment calculator.

Fees, prepayment rules and the title transfer

• Lender fees: some refinance lenders charge an application or origination fee; many charge none. Any fee belongs in the APR, so compare APRs, not rates.
• State title and lien fees: recording the new lienholder usually means a state fee, which the new lender may pass on to you. Taxes, title and registration fees are set by the state and aren't negotiable.
• Prepayment penalty: check your current contract. On precomputed loans longer than 61 months, federal law bars the "Rule of 78s" and requires a refund of unearned interest that is at least as favorable as the actuarial method.

The title paperwork is mostly handled between the lenders and your state's motor vehicle agency. The old lender releases its lien once it is paid, and the state records the new lender, on a paper title or electronically. In some states you may need to sign a form or an authorization, so answer the new lender's requests quickly.

When refinancing doesn't pay

• You have only a year or so left, so most of the interest is already paid.
• The new APR is barely lower and fees eat the difference.
• You owe more than the car is worth and the only offer comes with a high rate or a longer term.
• The offer is a cash-out refinance: borrowing more than you owe adds debt against a car that is losing value.
• Your credit has dropped since you bought the car. Work on it first, then try again.

If the real problem is that you can't make the payment, talk to your current lender before you refinance into a longer loan. A deferral or due-date change may cost less; see hardship and forbearance.

Add-on refunds and the interest deduction

If you bought gap coverage or an extended warranty with the original loan, you may be entitled to a partial refund when that loan is paid off. The CFPB says to check your paperwork or ask the lender, the provider or the dealer. Decide whether you still need the coverage on the new loan rather than buying it again by default.

If your car qualifies for the federal deduction on new, US-assembled vehicle loans taken out after 2024 (up to $10,000 of interest a year, for tax years 2025 through 2028), the IRS says interest on a refinanced qualifying loan is generally still eligible. Tax guidance indicates that borrowing more than the old balance can disqualify the extra amount, so keep a cash-out out of the plan.

Before you refinance

1. 1 Get your payoff amount and remaining term from your current lender, and check the contract for a prepayment penalty.
2. 2 Prequalify with three or more lenders, including a credit union. Our prequalification guide explains soft checks.
3. 3 Match the term to what you have left, then compare APRs and the total of payments with what you'd pay by staying put.
4. 4 Ask about every fee, including state title and lien charges, and whether add-ons are bundled into the new loan.
5. 5 Keep paying the old loan until it shows a zero balance, and watch for your refund of any unused add-ons.

Common questions