Auto Loan Refinancing Could Help Your Credit: Here's How

4 MIN. READ

Key takeaways:

• Auto refinancing allows you to replace your current car loan with a different product that comes with lower interest rates and potentially a better term.
• It can help your credit score by lowering your monthly payments and giving you more control over your budget.
• Before refinancing, make sure your credit is good enough to unlock a better rate and consider fees. 

Your car payment can feel like a fixed part of your budget. You have to keep making these payments until you’ve paid off your car.

What if there was a way to make a few changes? It’s possible with auto loan refinance, a financial move that can save you money and improve your credit score. Read on for our tips on refinancing an auto loan and securing the best auto refinance rates.
 

What Is Auto Refinancing?

Before talking about savings or boosting your credit score, let’s take a closer look at how auto refinancing works:
 

• You currently have a loan on your car, which may or may not be the best deal you could have gotten when you bought it.
• Now that your credit score is a little better and you have built equity in your car, you can get a better loan. This means lower interest and a longer term.
• You can go to a different lender, apply for an auto refinance, and get a new loan issued. You’ll repay the old loan with these new funds and make your monthly payments to your new lender.

It’s a simple process, and you could save thousands by securing a lower interest rate. Getting a different term for your loan, for instance, by replacing a 36-month car loan with a 48-month one, will reduce your monthly payments and help you balance your budget.
 

Your Credit Score and Auto Loans

Initially, refinancing your loan will cause a small dip in your credit score since you’re opening a new loan. The score will go up after that:
 

• With a longer term and smaller payments, it’s easier to stay on track and never miss a due date. Plus, smaller payments free up money for other things, like paying off your credit card faster.
• If you can get a new loan with better interest, take advantage of it to pay a little more toward your principal. You’ll pay off your car, reduce your credit utilization rate, and build equity in your vehicle faster.

Getting an auto loan refinance can also improve your credit mix. If you initially financed your car at a buy-here-pay-here dealer, you can replace this loan with a more traditional product from a bank or credit union.
 

Should You Refinance Your Auto Loan?

Is refinancing the right option for you? The whole point of refinancing is to get a better interest rate and potentially a longer term for your loan. However, if your credit score recently went down or you took on new debt, now might not be the best time to refinance. 

You also have to consider that interest rates go up and down based on the market. The overall trend saw car loan rates jump in 2022 and 2023 before going back down in 2024 and 2025. If you bought a car while rates were climbing, refinancing could be interesting.

If you have some extra cash available, refinancing could be a smart financial move. You can use that money to pay down your current loan balance before refinancing the remaining amount. This approach gives you access to better rates on a smaller loan. 

There are a few additional things to consider when refinancing a car loan:
 

• Watch out for fees. Your old lenders might have some prepayment penalties, and your new lenders will likely charge an origination fee on the new loan.
• If you’re close to paying off your loan, going through a refinance might not be worth it.
• Don’t hesitate to shop around so you can compare auto refinance rates. Some lenders will offer better deals than others.

Explore Auto Refinancing Rates With PFCU

Thanks to their not-for-profit structure, credit unions can offer lower interest rates than traditional banks. In fact, the average interest rate for a 48-month used car loan at a credit union is 5.82%, while banks offer an average interest rate of 7.79% for the same product.

If you got a loan through a bank or financed at the dealership, switching to a credit union could save you big. At Power Financial Credit Union, we offer transparent terms, no hidden fees, and a simple process for refinancing your loan. Our team is here to help, whether you’re applying online or visiting one of our South Florida branches.

Learn more about our auto refinance rates here.

FAQs About Auto Refinancing 

Can I change the loan term when I refinance?

Yes, you can extend or shorten your loan term when you refinance. Be mindful of how this will impact your monthly payments and total cost of borrowing.
 

How many times can I refinance my auto loan?

There are no limits, but lenders might not approve your request if you’re refinancing your car too often.
 

Are there fees for refinancing an auto loan?

Yes, most lenders will charge an origination fee for your new loan. You might also have to pay a prepayment penalty with your old lender.
 

Will refinancing my car loan hurt my credit?

Refinancing means you’re opening a new loan, which will show up on your credit report. However, your score will likely go up shortly after as you make your payments on time.