U.S. consumers owe a record $1.66 trillion in auto loan debt, according to the Consumer Federation of America, making it the largest category of consumer debt after mortgages. Nearly one in five (19.3%) borrowers have monthly car payments of at least $1,000, quadruple the number in 2019.
Auto lending is in turmoil, with delinquencies and defaults rising across income levels and credit tiers. Some 2.2 million cars have been repossessed so far this year — the highest number since the Great Recession.
Many borrowers are hoping the back-to-back rate cuts instituted by the Federal Reserve in September and October will create an inviting atmosphere for refinancing. When the Fed lowers its benchmark federal funds rate, interest rates on auto loans and other financing usually follow suit.
So far, the signs are encouraging. According to online marketplace Caribou, the average auto refinance rate in January 2025 was 8.35%. By September, the month of the Fed's previous cut, it had fallen to 7.62%.
Borrowers who refinanced in September lowered their rates by an average of 3.82%, resulting in a monthly savings of $157. With the Fed funds rate down to a range of 3.75% to 4.00%, is now the time for car owners saddled with high-interest loans to pull the trigger on refinancing?
The short answer? It depends.
Yossi Levi, founder of the automotive media site Car Dealership Guy, says borrowers who can afford to wait should try. "I put out a newsletter preparing dealers for a refi boom at the end of the year or even the beginning of 2026," Levi told CNBC Select. "I think we're getting there, but we may just be six months out at this point."
But six months may be too long for borrowers at risk of defaulting or going upside down on their loan.
As of October 29, CME Group's FedWatch puts the likelihood of a 25 basis-point cut in December at 68.4%. That's a sizable drop from the 90% odds posted just a day earlier and a reflection of Fed Chairman Jerome Powell's statement that another cut in 2025 "is not a foregone conclusion." (The Fed has forecast just one rate cut for all of 2026.)
Whether you're seeking immediate relief or can wait for an even better rate environment, there are several questions you should consider to determine whether you're a good candidate for refinancing.
1. How does your credit look?
Levi, who speaks regularly with dealers about sales activity, said he has noticed a "lending squeeze" over the past six months. Economic uncertainty and the auto loan crisis have caused lenders to tighten their credit score requirements.
Standards vary, but you'll need at least a 620 FICO Score to refinance and a 700 to get the lowest interest rates and most favorable terms.
"If you have damaged credit, it's pretty hard to handle a refi," Levi said.
If you can wait to refinance, use the time to improve your credit. The difference between a 620 FICO score and a 700 could lower your APR by 4.4%, according to FICO, representing a savings of more than $100 per month.
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The largest auto insurer in the U.S., State Farm has an excellent reputation for customer satisfaction and affordable rates, even for teens.
Available to service members, veterans and their families, USAA routinely scores highly on J.D. Power's customer satisfaction surveys for auto insurance. Discounts for bundling, safe drivers, new cars, and loyal customers. Add-ons include rideshare insurance, coverage for classic cars and commercial autos, roadside assistance and rental car reimbursement.
2. How much is your car worth?
Before refinancing, estimate your car's current market value versus how much you still owe on your loan.
"Refinancing can be tough if you owe a lot more than it's worth," he said, a situation known as an upside-down or underwater car loan.
If you plan to wait for more rate cuts, remember that cars just depreciate more over time. So if you're heading toward an upside-down loan, there's no sense in delaying.
You can learn your car's estimated value by inputting the make, model, year and condition into online valuation tools on sites like Kelley Blue Book or Edmunds.
3. How much do you owe?
You'll also want to think about your total outstanding balance. Many lenders require a minimum loan amount to be approved for refinancing.
Bank of America's minimum is $7,500, for example, while Chase's floor is $4,000.
To protect their investment, lenders structure car loans so that a bigger slice of early payments goes toward interest. If you're in the final stages of financing, interest is likely only a small fraction of each payment.
Refinancing restarts that cycle, often making it a less cost-effective choice if you don't have a large balance remaining.
4. Do you want a lower rate or a longer term?
Depending on your financial goals, you may be more focused on smaller monthly payments or reducing your overall interest.
Caribou's report indicates more borrowers are opting for 84-month refinancing, the longest term available. With longer-term APRs averaging 7.66% to 7.78%, an 84-month refi would deliver the biggest monthly savings — nearly $180.
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Meet our experts
At CNBC Select, we work with experts who have specialized knowledge and authority, grounded in relevant training and experience. For this story, we interviewed Yossi Levi, founder of Car Dealership Guy. Yossi was named an Ernst & Young Entrepreneur of the Year in 2021 and has been listed on Goldman Sachs' Top 100 Most Intriguing Entrepreneurs.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice to help them make informed financial decisions. Every auto loan article is based on rigorous reporting by our team of expert writers and editors. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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