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Pros & Cons of Car Refinancing

By Jody McMaster · July 30, 2021 · 3 minute read

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Pros & Cons of Car Refinancing

For many of us, buying a new or used car means getting an auto loan, which can have a major impact on the monthly budget. Refinancing that loan may make sense if you can get a better interest rate or preferable terms.

The typical auto loan term is 63 months, but loans of 72 and 84 months are becoming more common. The longer the term, the higher the interest rate, in general.

As you think about the cost of driving, chew on this: The average price of a new light vehicle has reached nearly $40,800, dwarfed by the average for a luxury full-size SUV, at $98,000, Kelley Blue Book says. And can you guess what the biggest annual cost of car ownership is, according to AAA? Depreciation.

What Is a Car Refinance?

Drivers who opt for refinancing a car loan use another loan to pay off the balance on an existing auto loan.

The goal is a lower interest rate and/or lower monthly payments. Some people, unable to lower their rate, may be able to extend their repayment term in order to secure lower monthly payments.

Refinancing a car doesn’t automatically mean a lower interest rate or lower monthly payments. The rate you’re offered depends on your current financial situation and the lender.

But if your credit score and debt-to-income ratio have improved since you took out your car loan, refinancing could potentially save you money.

Discover real-time vehicle values with Auto Tracker.¹

Now you can instantly monitor vehicle prices in this unprecedented market—to help you make smart money moves.


Pros of Refinancing a Car Loan

Here are reasons why you might want to look into an auto refinance loan.

Your credit score has improved since you took out your current loan, making it possible to qualify for a lower interest rate on a new loan. Refinancing might not be for you if your financial history hasn’t improved since you first got your car loan, or if your credit score has decreased.

You’re looking to lower your monthly payments either with a rate reduction or a longer loan term.

You have a balance over $5,000. Many lenders won’t refinance a car loan that has less than $5,000 remaining.

Cons of Refinancing a Car Loan

Here are some reasons why you might not want to refinance your car loan.

A longer term may mean more interest paid. Extending the length of a car loan at the same rate will result in more interest paid over the life of the loan. For example, a $15,000 auto loan with an effective annual percentage rate of 7.5% and with five years remaining would cost $18,034 in total. Extending that loan to a seven-year period would cost $19,326—a difference of $1,292.

A lower rate isn’t guaranteed. Refinancing a car loan doesn’t always mean a lower interest rate. A credit score decrease since you took out the loan could mean you’re only eligible for a higher rate than your current car loan.

A balance under $5,000 often won’t qualify. Most lenders won’t refinance a car loan that has less than $5,000 remaining.

Options to Car Refinancing

Balance-Transfer Credit Card

Many balance transfer credit cards don’t require interest payments for several months, making them a potential alternative.

This move is probably only worthwhile, though, if the auto loan balance can be paid off during the interest-free time, which can range from six to 21 months.

Personal Loan

A personal loan can be used for everything from unexpected medical expenses to home repairs to auto loan payoff.

If your car loan balance is over $5,000 and you’re able to get a lower interest rate or change the term, a personal loan could be worthwhile.

Auto loans are secured: They require you to use the car you’re buying as collateral for the loan. The vehicle could be repossessed if you don’t repay the loan.

Personal loans are not secured by collateral.

The Takeaway

Although a car loan refinance isn’t for everyone, it may be a good choice for drivers looking to lower their interest rate or change the length of the loan.

If a personal loan of $5,000 to $100,000 sounds like it could be a good fit, check out SoFi fixed-rate personal loans. They come with no fees and with terms of up to seven years.

Check your rate in just 1 minute.


SoFi’s Relay tool offers users the ability to connect both in-house accounts and external accounts using Plaid, Inc’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score provided to you is a Vantage Score® based on TransUnion™ (the “Processing Agent”) data.
¹SoFi’s Relay tool offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc’s service. Vehicle Identification Number is confirmed by LexisNexis and car values are provided by J.D. Power. Auto Tracker is provided on an “as-is, as-available” basis with all faults and defects, with no warranty, express or implied. The values shown on this page are a rough estimate based on your car’s year, make, and model, but don’t take into account things such as your mileage, accident history, or car condition.
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