What does it mean to refinance a car loan?

When you take out a loan for a car, the car is considered the collateral for the loan. If you default on the loan, the lender can seize your vehicle and sell it to recoup at least some of their losses.

Refinancing your car means swapping out your old auto loan for a new one that has different terms, such as a lower interest rate or shorter repayment period. Why would you want to do this? There are several reasons why refinancing could make sense:

Better credit score. Your credit score may have improved since you took out your first auto loan or lease. With better credit comes lower interest rates and more options when shopping around for refinanced loans.
Lower monthly payments. Rates aren't guaranteed to drop just because you've been making timely payments on your current auto loan, but they may be lower now than when you first got your loan thanks to market fluctuations. Lower rates mean lower monthly payments, which means more money in your pocket each month!
Shorter repayment period. Refinancing gives you an opportunity to shorten the length of time it takes to pay off your auto loan by paying off some of the principal while getting locked into a possibly lower interest rate over time than what's left on your current car loan contract (assuming a fixed-rate agreement). You'll end up paying less in interest overall when speeding up repayment time like this!

What are the benefits of refinancing a car loan?

If you refinance your car loan to get a lower interest rate, your monthly payments will go down. If you can negotiate a longer term, the monthly payments will likely also be smaller. Either way, refinancing can save you money each month—and possibly hundreds or thousands of dollars over the life of the loan.

What are the risks of refinancing a car loan?

It's important to remember that refinancing is an option, not a guarantee. There are some risks to be aware of before deciding to refinance your car loan.

Refinancing can cost you more in the long run—To qualify for a new loan with lower monthly payments, you may need to extend the term of your auto loan. This could result in paying more interest over the life of the loan. If you refinance your car and ultimately end up paying more interest in the long run, this might not be the right choice for you.
Refinancing can be a risk if you have bad credit—People who have low credit scores or have missed a lot of payments on their existing loans are considered high-risk borrowers by lenders. They're typically offered higher interest rates because they're seen as being less likely to pay back their debts on time, if at all. Even if you qualify for refinancing, it may come with unfavourable terms that aren't worth accepting just to consolidate two loans into one payment.
Refinancing may extend the term of your loan—By extending payment periods (or raising the amount borrowed), consumers might find themselves trapped in debt longer than expected or owing more than they initially planned on spending

How do I know if refinancing is right for me?

There are a few signs that refinancing could be a smart move. If you’re getting a much lower rate with your new lender, it is probably going to benefit you. The key to deciding if refinancing makes sense for you is weighing the interest savings against the extra money you will pay over the life of the loan.

You can use our calculator to see how much you would save if you refinance. You can also calculate how much extra money you would pay over time, and weigh that number against your monthly savings (which is also shown in the calculator).

If your goal is to lower your monthly payment, but not necessarily make progress toward paying off your car faster, then refinancing may be right for you. But just like any other loan decision, refinancing comes with pros and cons.

How do I refinance a car loan?

When considering how to refinance a car loan, there are a few things you should keep in mind: understand your options, shop around with different lenders, check your credit score and do your research. You’ll want to be prepared to provide the lender with documents and be open to negotiations. Ask questions and make sure you read through the contract before signing it.

Refinancing can lower your monthly payments, but it can also cost you more over the long term. Weigh the options carefully before you commit.

You can refinance your car loan for a lower interest rate, but there are drawbacks to doing so. If you have a high-interest car loan, refinancing it could lower your monthly payments and save you money in interest charges. But by stretching out the term of your new loan, you'll pay more in interest over the life of the loan. And if you refinance for a shorter term, your monthly payments will go up.

For example: Say you have a five-year car loan at 6 percent APR with 60 monthly payments of $350 each — totaling $21,000 over five years:

If you refinance to keep the same term and get an APR of 4 percent on your new loan, you'll pay $51 less per month — but if that's stretching your budget too thin, then refinancing may be a bad move for you financially.* If instead you want to save money over the life of the loan by reducing how much interest accrues on it, then refinancing for a longer term — say seven years — at 4 percent APR will cost $163 less per month ($187 vs. $350) but increase your total interest paid from $3,600 to about $4,700.*

Can car loans be refinanced?