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Illustration of a purple two-door car.
Illustration of a purple two-door car.
Illustration of a purple two-door car.

Published July 8, 2015.
Updated November 5, 2018.

Borrowers often come out ahead ― but do the math to make sure.

If you found a $100 bill on the sidewalk, you'd probably pick it up. Yet many car and RV owners overlook the chance to pocket cash by refinancing their vehicle loans at a lower rate.

Credit unions, banks, and other lenders compete for vehicle loans by regularly offering refinancing deals that cost you almost nothing. Some lenders offer cash back (typically a percentage of your refinanced loan) or other incentives.

When you refinance, the lender writes you a check to pay off your old loan at a lower rate, and you begin making payments to your new lender. Your car's title is transferred from the old lender to the new one.

Compared with when you originally took out your car loan, it's a simple process: Refinancing requires no appraisal and usually little or no fees, and many lenders accept online applications.

Four reasons to refinance

  1. To lower your monthly payment. Refinancing could free up money for other needs.
  2. Because interest rates are lower. If you're paying 7 percent interest, and lenders are advertising rates as low as 4 percent, you may be able to save money on interest. "Refinancing is so simple that if it lowers your rate, it's usually worth doing," says Rich Lentz, director of consumer lending at STCU.
  3. Because your credit score has improved. If you had no credit history or there were dings on your credit report when you took out your loan, you may have been charged a higher rate. Lenders might reward you with a lower rate now.
  4. To shorten your term. If you recently got a promotion or a better-paying job, you could refinance your vehicle loan to a shorter term (length of the loan) to pay off your vehicle faster. Your monthly payments might be higher, but you'll get out of debt sooner and likely pay a bit less in interest.
“Refinancing is so simple that if it lowers your rate, it's usually worth doing,” says Rich Lentz.

Four reasons to not refinance.

  1. Your loan is "upside down." Lenders may not refinance a vehicle that's worth less than you owe on your loan. You can get an estimate of your vehicle's value through Kelley Blue Book and elsewhere online.
  2. Your vehicle is too old. Lenders may apply a higher interest rate to refinance an older auto or RV.
  3. Your current loan has a prepayment penalty. Penalties for paying off vehicle loans are rare but can wipe out any savings. Some lenders also charge a refinance fee on existing loans, so check before you refinance.
  4. You might pay more if you extend the term of the loan. If you're set to pay off your loan in 36 months, refinancing to 48 or 60 months could cost you more. Refinancing may lower your monthly payments, but if it requires a longer loan term, you could rack up more in total interest charges.