Sarah T.
Refinancing a car loan can be a great money move to keep more in your pocket or adjust your monthly payments, but it’s not always clear on what you need to do. While the process offers some big-time benefits—like better interest rates or repayment terms—some pitfalls can turn a good deal into an expensive mistake.
From knowing your loan details to understanding how your credit score factors in, being informed can help you make decisions that align with your financial goals. Let’s take a look at what you should avoid when refinancing your car.
- Not Understanding Your Current Loan Terms
The biggest mistake you can make when refinancing your car is not understanding the terms in your existing auto loan. And we get it. It can be so easy to sign on that dotted line when you first take out the loan that as time goes by, you don’t really remember many of the details aside from what you need to pay each month.
So, before refinancing a car, take a look at your existing loan’s interest rate, the remaining balance, and your repayment period. It’s also a good idea to look at how much your car might be worth by looking it up in Edmunds or Kelley Blue Book.
The key here is that when refinancing, you want to understand what your true savings will be.
- Ignoring Your Credit Score
Your credit score holds far more power than you might realize. The higher it is, the better loan terms you can receive when applying for a new loan. And the lower your score is, the higher your chances are for denial, high interest rates, and additional fees.
Before refinancing, check your credit score through free tools like Credit Karma or your bank’s credit monitoring service. If your score isn’t where you’d like it to be, take steps to improve it—pay down existing debts, make payments on time, and avoid taking on new loans or credit cards.
Refinancing with a poor credit score can cost you more in the long run, as higher interest rates may cancel out any potential savings. Taking the time to check and improve your credit score beforehand can make refinancing far more worthwhile.
- Choosing a Longer Loan Term Without Evaluating Costs
Extending your loan term can seem like an easy fix to lower your monthly payments, but it often comes with a hidden downside: paying significantly more in interest over time. While the reduced monthly amount might free up some room in your budget, stretching the loan means the lender has more time to charge interest, increasing the overall cost of the loan.
It’s important to weigh the benefits of a smaller payment against the total amount you’ll pay by the end of the loan. Striking the right balance between affordable monthly payments and a reasonable repayment timeline can help you avoid unnecessary expenses.
- Overlooking Fees and Penalties
Though you may feel inclined to overlook the fine print on your loan agreement, we highly advise against it. No lender should ever make you feel pressured to sign your agreement without giving you adequate time to review all the details. And one important thing to look for is an explanation of fees and costs.
For example, you may be subject to a prepayment penalty if you decide to pay your loan off early. Typically, prepayment penalties are approximately 2% of your remaining loan balance. And, you may also be subject to an application fee that will be built into the overall cost of your loan. For personal and automobile loans, this is typically between $15 and $50. However, the only way to know your specific fees is to review what is outlined in your loan terms.
- Failing to Verify the Lender’s Reputation
You wouldn’t trust the care of your child to just anyone, so why would you trust your money to just any lender that you come across? Taking time to research lenders is important for protecting yourself from questionable offers or hidden fees. Look for lenders with a proven track record, credible reviews, and transparent terms. Online reviews, Better Business Bureau ratings, and recommendations from trusted sources can give you a good sense of a lender’s reputation.
When evaluating offers, keep an eye out for these red flags:
- Unclear loan terms or a lack of written documentation.
- Guaranteed approval, regardless of credit history.
- Extremely low interest rates that seem too good to be true.
- High upfront fees or pressure to pay application costs immediately.
- Aggressive sales tactics or unclear responses to your questions.
- Refinancing at the Wrong Time
Last but not least, be thoughtful on the best time to refinance a loan.
Refinancing your car loan isn't always a good idea, especially if you're planning to sell your car in the near future. If you sell your car shortly after refinancing, you might not recoup the costs associated with the new loan, such as any fees or the interest paid during that period. In such cases, the effort and expense of refinancing may not provide any real benefit.
Additionally, market conditions play a big role in deciding when to refinance your car loan. For example, if interest rates are on the rise, you might end up with a higher rate than your current loan offers. Conversely, when interest rates are falling, it could be an opportune moment to secure a better deal. Keeping an eye on economic trends and understanding when to refinance your car loan can help you make a choice that truly saves you money.
Refinancing a Car: What to Avoid for a Smarter Loan Decision
Refinancing a car can be a smart move to save money or adjust your payments, but avoiding common mistakes is key to making it worthwhile. From understanding your current loan terms to monitoring your credit score and evaluating lenders, taking a thoughtful approach will help you make the most of the opportunity. Always review auto refinancing loan terms carefully and consider timing to avoid unnecessary costs.
Ready to explore your options? Visit RateWorks to get a free quote now and see how refinancing can work for you.
