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Refinancing a Car Loan: What to Consider

By Becca Stanek · February 27, 2023 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Refinancing a Car Loan: What to Consider

You’ve probably heard of “buyer’s remorse” — that sense of regret people experience after making a big purchase like a car. What you don’t hear so much about is borrower’s remorse, which is the dissatisfaction that car buyers sometimes feel when they realize the financing they got through the dealer is costing them more than they thought.

Even the toughest hagglers can miss things when they hit the dealership’s business office and begin negotiating loan terms. But that doesn’t mean you can’t pump the brakes, pull over, and try again. Refinancing a car loan certainly isn’t for everyone, but it could be a potential option as long as you understand how to refinance a car and what the implications are.

When Refinancing a Car Loan Might Make Sense

Refinancing a car loan is the process of getting a new loan that essentially replaces the existing loan. The process involves filing a new loan application, and lenders will generally evaluate potential borrowers based on factors like their credit score and history to determine their new loan terms and interest rate.

Generally, borrowers refinance to secure a better interest rate or more favorable terms. For example, a lower interest can help borrowers pay less in interest over the life of the loan. Sometimes, borrowers may extend their repayment term to secure lower monthly payments. This can make the loan payments more affordable on a monthly basis, though ultimately it makes the loan more expensive in the long run.

Now that you know you can refinance a car loan, let’s take a look at when doing so might make sense.

Recommended: Pros and Cons of Car Refinancing

You Think You Can Do Better Than That Dealer-Sourced Loan

When you finance your car through a dealer, it can feel as though you’re going through some mysterious selection process. After the fact, you may realize that you could’ve found a better deal on your loan. Or, you might just come to hate working with your current lender. In either case, it might make sense to look into refinancing your car loan.

Your Overall Financial Position Has Improved

Perhaps your car loan was offered to you at a time when your finances weren’t as solid as they are now. Maybe you’ve since gotten a better job, paid off some debts, or have been working on making consistent payments on debts. Borrowers who have seen improvement in their financial situation or credit score may want to consider refinancing.

In that scenario, you may be able to qualify for a personal loan at a better interest rate than your original auto loan. This could lead to savings on interest, potentially lowering your monthly payments. With SoFi’s personal loan calculator, you can compare what you’re currently paying to the estimated payments you might have with a new loan.

Interest Rates Have Improved Since You Borrowed the Original Loan

Another reason to consider refinancing a car loan is if interest rates have changed since you originally bought the car. Interest rates on auto loans are influenced by benchmark rates, like those set by the Federal Reserve.

If the Federal Reserve rate is low, interest rates for borrowers may also be lower. But as the Federal Reserve rate increases, the cost of borrowing money is also likely to increase.

An Alternative to Car Loan Refinancing: Personal Loans

In some situations, you might consider taking out a personal loan to pay off your auto loan rather than refinancing. In fact, debt consolidation is one of the common uses for personal loans. This option might make sense if you have an older car or a model or mileage that disqualifies you from refinancing, or if you’re underwater on your loan.

With an unsecured personal loan, which is the main type of personal loan you’ll come across, you can apply for the remaining amount of the car loan. Just keep in mind that lenders have minimum loan amounts — for example, SoFi’s minimum personal loan amount is $5,000 (and more in some states, due to legal requirements).

To decide if this option makes sense, you’ll want to see if you get your personal loan approved for a better interest rate than your auto loan. Because auto loans are secured (meaning they’re backed by collateral — in this case, your car) they tend to have lower rates than unsecured loans, though not always, depending on your financial specifics.

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The Takeaway

Refinancing a car loan may make sense for borrowers who can secure a better interest rate or otherwise more preferable terms than they have on their existing car loan. If a borrower’s financial situation has improved, or if benchmark interest rates have fallen, they may consider looking into refinancing options.

An alternative path to consider is taking out a personal loan to pay off your auto loan. SoFi offers competitive rates on personal loans to qualifying borrowers. Plus, there are no prepayment penalties on SoFi personal loans.

If you’re considering refinancing, see how a personal loan from SoFi might help.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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