Car Loan Refinance: Is It Worth It to Get a Lower Payment?
- Refinancing is generally only worth it if the savings on interest outweigh the cost of loan fees and term changes.
- Longer loan terms can lower your monthly payment but cost more in interest fees.
- Check for green flags like an improved credit score, and red flags like a prepayment penalty, before you decide to refinance.
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If you’ve been feeling squeezed by high interest rates, you’re not alone—and you may have noticed some signs of relief lately. The Federal Reserve has started bringing rates down from historic highs, and recent tax cuts have left many people with larger refunds than expected. Together, that’s helped push auto refinances up 70% year over year. Still, rates remain well above their decade lows, so it’s smart to weigh your options carefully.
Is now the right time to refinance, or should you wait and see? It depends on whether you come out ahead after fees, term changes, and the fine print. Rates are just one thing to think about. An auto refinance should move you closer to your financial goals. Your first step in getting a good deal is comparing monthly fees and total cost.
Car Loan Monthly Payment vs. Total Cost: the Math
Lenders often ask you to choose between a lower monthly payment or a cheaper loan.
Say you’re clicking around an auto loan marketplace, shopping for quotes. You enter your info, and the marketplace spits out a half-dozen loan estimates. You, being sharp, notice a consistent pattern: loans with shorter terms have higher monthly payments but cost less overall.
If the budget is tight, you might choose a smaller loan payment with a longer term. If you have padding in the budget, you might choose a larger monthly loan payment with a shorter term (and therefore save on interest).
You might notice that credit unions tend to offer the lowest rates. On average, customers who refinance a loan with a credit union save nearly twice as much as those who refinance with a bank, according to Experian.
Should You Refinance Your Car Loan?
Check out signs that signal your refinance is a good idea—or a bad one.
Green flags:
Your credit score has improved since your original loan
Overall interest rates have dropped
Your original loan was dealer-financed
At least two years remain on your current loan term
Red flags:
Your current loan has a prepayment penalty
You’re close to payoff
You can’t qualify for a loan with a lower interest rate
If a refinance looks attractive, shop around for quotes. Collect three to five to get the best deal. Prequalify using a soft credit check to get estimates from lenders. Prequalification doesn't impact your credit score.
How to Save Money on a Car Loan Refinance
When possible, avoid origination fees, add-ons, and unnecessary insurance to keep fees more affordable. Turn down what you don’t need. Upselling is real, so be ready to push back or say no.
Origination fees
Some lenders charge an origination fee, typically 1% to 2% of the total loan amount. If you're only able to drop your interest rate by the same amount, you could end up with a wash. You may be able to negotiate a lower origination fee with your broker/lender.
Add-ons
Auto loan brokers may try to sell you add-ons like service contracts or extended warranties. These are generally considered unnecessary and could overlap with protections you already have. The original manufacturer typically covers some auto parts, and warranties might not offer much additional protection. Brokers are heavily incentivized to push these, so think carefully and check online reviews before accepting these add-ons.
Unnecessary insurance
Lenders or brokers may try to bundle nonessential insurance into your contract, like GAP insurance (guaranteed asset protection), which covers the difference between what you owe and what your car is worth if your car is damaged or stolen.
You might not need these extras at all, especially if your loan balance is below your car's value. And if you do want GAP coverage, buying it through your auto insurer is usually much cheaper than bundling it into your loan.
Cancel what you don’t need
If you bought something you don’t need, you can cancel. For example, you can cancel GAP insurance and extended warranties, usually for a prorated refund.
The process isn't easy. You'll need to contact the provider and the dealership, submit paperwork, and wait for weeks or even months. And the refund doesn't typically come to you. It goes to your lender and gets applied to your loan principal. Your monthly payment stays the same unless you refinance again.
What It’s Like to Refinance a Car
The refinancing process will vary based on the lender and how you apply. You could apply online or in-person. Generally, refinancing involves:
Fill out the application
Wait for a decision
Hammer out the loan terms with the lender
Sign the paperwork
Pay off your existing loan with new loan
Start making monthly payments on the new auto loan
There’s always a chance that the lender will try to upsell you—GAP insurance, extended warranties, service contracts. You already know what these are and whether you need them. Expect the pitch and be ready to say no.
If you purchase something you don’t need, you can cancel it for a prorated refund. Canceling can be difficult, and representatives will likely try to get you to change your mind. Stand your ground, or even better, say no when signing up.
Before you sign up, read over the terms and take your time. Don’t let the representative rush you. It’s smart to talk to multiple lenders. It takes more time, but the payoff is having options that give you negotiating leverage. More importantly, you could feel more confident turning down an offer when you know you could get a better deal.
When Refinancing Isn’t Enough
A car loan refinance may just solve one part of an overwhelming debt burden. Many people are struggling. When you’re behind on payments, refinancing could be difficult. A single late payment might drop you into a lower credit score tier.
Each tier has a big impact on loan offers. Auto loan shoppers with poor credit scores are typically offered rates that are two or three times higher than rates for borrowers with excellent credit.
When you feel as if your debt has you stuck, refinancing alone may not fix your finances. If your car payment is one piece of a larger problem, it could be worth exploring broader auto loan debt relief options. Strategies to consider include:
Selling the car and getting one that's more affordable
Reworking your budget to cut costs
Adding a side hustle or asking for a raise to boost income
Negotiating with lenders for a lower rate
Settling unsecured debt for less than you owe, on your own or with a debt relief company
Refinancing your car loan is just one of many tools you may have to improve your situation or reach financial goals. You have the power to change your finances for the better.
Author Information
Written by
Cole Tretheway
Cole is a freelance writer. He’s written hundreds of useful articles on money for personal finance publications like The Motley Fool Money. He breaks down complicated topics, like how credit cards work and which brokerage apps are the best, so that they’re easy to understand.
Reviewed by
Kimberly Rotter
Kimberly Rotter is a financial counselor and consumer credit expert who helps people with average or low incomes discover how to create wealth and opportunities. She’s a veteran writer and editor who has spent more than 30 years creating thousands of hours of educational content in every possible format.