Determine If Auto Refinancing Makes Sense For You

While refinancing your car can offer many benefits, it’s not a one-size-fits-all solution. Before going too far into the process, ask yourself these questions.

Is there a prepayment penalty?
If your current loan has a prepayment penalty, it may not be worth trying to refinance. A prepayment penalty means that you’ll be hit with a fee for paying the loan off early.

What fees will you be responsible for?
There could be fees needed to reregister the vehicle and transfer the title after refinancing. These fees vary by state, so it’s worth looking into what it costs in your state before refinancing.

Is your loan balance higher than the value of your vehicle?
Kelley Blue Book offers resources and tools for finding used-car values. If the outstanding loan amount is higher than the car’s market value (referred to as being upside down on a loan), you may have trouble getting approved for a new loan or see little difference in the new loan terms offered to you. Some lenders may allow you to roll the outstanding balance on your current loan into your new loan, but keep in mind that this will add to your overall debt.

How old is your car?
Lenders may have restrictions on whether they will refinance a car. For example, some lenders won’t allow a refinance on cars over eight years old or with more than 100,000 miles on the car.

Has your credit improved?
If your credit has improved, refinancing could result in a lower interest rate, which could save you money in interest over the life of the loan. But if your credit hasn’t improved, getting a lower rate may be difficult unless interest rates have dropped since you got your current loan.

If you’re not sure, check your credit to get an idea of where your credit’s at. Checking your credit reports can also help you identify any potential errors that may be impacting your credit scores and work on disputing them.