Refinancing your car loan has the potential to save you money. Unfortunately, there are many mistakes people make when refinancing a car that can result in picking a loan that isn't the best available option. Here are a few mistakes to avoid making when refinancing your car loan.
Not Knowing Your Credit Score
Your credit score is one of the main factors that determines what interest rate you will qualify for when you apply to refinance your car loan. To make sure you're not wasting your time, check your credit score before applying to refinance your car loan. If you score has increased since you obtained your original car loan, you may be able to secure a lower interest rate. However, if your credit score has decreased, you may not be able to find a better rate when refinancing your car loan. Once you know your score, you should be able to estimate what interest rate you will qualify for before you even apply to refinance your car. If the interest rates you qualify for don't meet your goals, work on increasing your credit score before applying.
Refinancing to Keep a Car You Can't Afford
It's easy to get caught up in the moment and buy a car you can't really afford when you're at the car dealership. Refinancing a car that you can't afford may lower your payments, but it may extend the length of your loan, too. If you truly can't afford a car, don't bother refinancing. Instead, sell the car and buy a more affordable vehicle that comes with a new or used auto loan payment that fits your budget.
Extending Your Car Payments Too Long
You may be extending your car payments too long if you simply pick the auto refinance loan with the lowest payment. Your original loan may have required you to make payments for anywhere from 24 to 96 months. You've probably made at least a few payments on your original car loan, so it may not make sense to start over again by taking out a longer period car loan when you refinance. Shorter loan terms may come with higher payments, but you'll likely pay less in interest and your car loan will be paid off faster.
There are other benefits to picking a shorter loan term, too. As your car ages, it will continue decreasing in value. Having a shorter loan term will lower the risk that you will owe more than you car is worth at any given point in the car loan term. Additionally, maintenance issues tend to pop up more toward the end of a car's lifespan. If you opt for a shorter car loan term, you can use the money that used to go toward car payments to build up a savings account to pay for future car repairs.
Not Shopping for the Best Deal
The best deal for refinancing a car loan depends on your goals. You can opt to get the lowest total cost car loan, the lowest total cost car loan within a certain loan term, or the lowest overall car payment. If you want to get a loan with the lowest overall cost, simply add up the total dollar amount of all payments and fees. The loan with the lowest dollar total will likely be the best deal, assuming other terms are equal. Often, the lowest cost loan will have a very short loan term. If you need a longer loan term, you can use the same analysis with car loans that all have the same loan term. For instance, you could analyze all loans with a term of 48 months and pick the best 48-month loan for you. If money is tight, you may be considering going with the lowest loan payment. The dangers of the lowest car payment are listed above, but sometimes the reality of your situation requires this option. In this case, it's easy to determine the best deal as it is the loan with the lowest payment.
If you can avoid the four common mistakes people make when refinancing a car mentioned above, you should be well on your way to getting a great deal on refinancing your auto loan.