Refinancing a car loan can lower your monthly payment, cut your interest costs or shorten your loan term.
But auto loan refinancing can also mean you pay lender fees and additional interest if you extend the loan term or cash out auto equity. You could also end up owing more than your car is worth.
What you get out of refinancing your car depends on your financial situation and the new loan terms.
As you decide whether refinancing your car loan is worth the time, effort or savings, here are some pros and cons to consider.
Pros of refinancing your car loan
You could pay less in interest
If your credit has improved or interest rates have gone down since you bought the car, you could qualify for a lower interest rate. This is especially true if you have consistently made on-time payments for six to 12 months.
If you can lower your current loan rate by 1% or more, you could save enough in interest over the life of the loan to make refinancing worth it.
You’re a prime candidate if you financed with a dealership. If you worked with your dealership to get a car loan, there’s a good chance that your current loan’s interest rate is higher than what you could qualify for with a different lender.
Dealerships often increase interest rates, a practice known as a dealer markup. This means you could end up paying more interest than if you’d financed directly with a bank. Dealers can typically add up to 2.5 percentage points to the lender’s rate, and one study of borrowers with strong credit found an average markup of about 1.1 percentage points.
You may lower your monthly payment
Refinancing to a lower payment could help if you can't afford your current one or want cash to pay off higher-rate debt. It can also help you during financial difficulty, like a sudden drop in income.
To significantly reduce your payment, you might have to extend your loan term. A longer loan means you’ll likely pay more interest over the life of the loan. On the other hand, a longer term can help if it prevents you from falling behind on car payments.
If you're struggling to make monthly payments but can’t qualify for a refinance loan that lowers your payment, talk to your lender about other debt relief options.
You might be able to pay off your loan earlier
If you’ve had an income increase since buying your car, consider refinancing your car loan to a shorter term and lower interest rate to pay off your loan sooner. Another option is to pay extra on your current car payment, but if you can refinance to a lower rate and shorter term, more of every payment goes toward principal automatically. You won't need to remember to pay extra.
You could tap the equity in your car
If you need cash, you may be able to borrow with a cash-out auto refinance loan using your car’s equity (the value of your car minus the amount you owe on it). This type of loan can help you get part of your car’s value in cash without selling the vehicle.
For example, if your car is worth $20,000 and you have $10,000 left to pay on your loan, you could get a refinance loan for $15,000 and take $5,000 in cash.
Cash-out refinancing has limits and downsides. We don't recommend it unless you have an emergency or plan to pay off higher-rate debt.
» MORE: 6 steps to refinance your car
Cons of refinancing your car loan
You could pay more in interest
If you refinance to a longer loan term to reduce your payment, you may actually pay more overall. A longer loan, even with a lower interest rate, means you’re paying interest over a longer time. Even a reduced rate may not offset the cost of continuing to pay interest for an extra year or two.
You might have to pay fees
Your state may charge fees to re-register your car or transfer the title. And your refinance lender could have application or origination fees. Your current lender might also charge a prepayment penalty for paying your loan off early, although prepayment fees aren't as common as they used to be. Compare your total in fees with the amount you would save from refinancing.
Ensure the fees don’t cancel out the savings
You could wind up upside down on your loan
Refinancing to extend your term or taking cash out of your equity could leave you owing more than your car is worth, which is called being upside-down on your loan. If you decide to sell or trade in your car, you would have to pay the lender the difference, which could amount to thousands of dollars.
How to know if you should refinance your car loan
Knowing the pros and cons of auto refinancing is helpful, but a few additional steps can help you decide if refinancing is right for you:
Have a clear goal. Do you want to lower your monthly payment, get cash for an emergency or pay your loan off sooner? Knowing what you want to do can help you compare loans and run numbers.
Get refinance loan offers. Shop auto refinance loans and rates with several lenders to see what rate you'll qualify for. Many lenders offer pre-qualification. You can get rate estimates without affecting your credit scores.
Run the numbers. Use our auto loan refinance calculator to compare your current auto loan with new offers and see your new monthly payment. You can also see your total cost or savings, including interest.
It’s always a good idea to weigh the pros and cons before you rush into refinancing a car. Even if your goal is simply to use your car’s equity for emergency cash, you should read the fine print and know the overall cost you're committing to.
Will I save money if I refinance my car loan?
Do all refinancing loans come with fees?
Is it always a good idea to refinance a car loan?
Article sources
- 1.MIT Department of Economics. Auto Dealer Loan Intermediation: Consumer Behavior and Competitive Effects. Accessed Oct 14, 2026.
