If you’re having trouble paying off your current loan, refinancing (replacing your current car loan with a new one) can be a great way to save money and stay behind the wheel. But there are some common mistakes you should avoid to make sure you don’t end up in another precarious financial situation.
6 Most Common Car Refinancing Mistakes
Avoid these common pitfalls when refinancing your auto loan.
1. Not Checking for Refinancing Needs
Lenders have specific refinancing requirements. Pay attention to criteria such as the age of the vehicle, mileage and even the remaining loan amount.
Tip: Check the lender’s website or Bankrate reviews for specific refinancing requirements.
2. Don’t check with your current lender first
While your current lender may have the most competitive rate, it’s still the best place to start. So before looking at refinancing options other than your current lender, it’s a good idea to get in touch with them and explain your situation to see if they can help.
Tip: Even if you’re still refinancing your loan, there’s a chance they’ll give you a better deal than a new lender.
3. Excessive extension of loan terms
The purpose of refinancing is to save money, but if you extend your loan too much, you may end up spending more money over the life of the loan. While longer loan terms mean lower monthly repayments, you’ll also pay more interest.
Tip: Before adjusting your term, use the automatic refinancing calculator to see if you’re saving money.
4. Don’t consider your creditworthiness
As with most financings, your credit rating is the main factor in approval. So work on improving your credit score before refinancing your loan. This way, you can get the best terms and get a better loan overall.
Tip: Before applying for a loan, use AnnualCreditReport.com to check your credit score.
5. Buy only one lender
Just like buying your first car loan, it’s a good idea to compare at least three different lenders. While it may be tempting to turn down the first loan offer you encounter, not all options are created equal.
Tip: Compare current rates from different providers. Pay close attention to approval requirements, repayment options, and your current loan fees.
6. Reverse your loan
Before refinancing, use a negative personal loan calculator to check where your vehicle’s equity is. Refinancing may not be a good idea if your debt exceeds the value of your car or your assets are negative.
Tip: Don’t refinance a vehicle you can’t afford. Before applying for a new loan, check where you might be over budget and calculate expected costs.
While refinancing your car loan can be risky, it’s a great way to reduce your monthly expenses and still be able to afford your vehicle. Keep these common mistakes in mind and stay up to date with current refinancing rates to ensure you get the loan that best suits your needs.
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