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9 Mistakes People Make When Refinancing a Car

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Getting stuck in a car loan that doesn’t fit your budget or paying a sky-high interest rate takes a lot of the fun out of owning your vehicle. One way to solve the problem is by refinancing your auto loan. Of course, like all financial matters, this one comes with a few pitfalls.

Taking a few minutes to educate yourself about the most common auto refinancing mistakes people make is a smart way to get through the process without paying more than you have to for your new loan.

  1. Extending the loan term
  2. Waiting too long to make a move
  3. Not talking to your current lender to learn about your options
  4. Not understanding your current loan
  5. Refinancing a car that’s too expensive
  6. Not checking your credit score
  7. Taking the first auto refinance deal you get
  8. Giving up if your application is denied
  9. Not using an online auto refinance loan calculator to evaluate your choices

9 mistakes people make when refinancing an auto loan

While there aren’t statistics about the most common auto refinance mistakes, there are a few missteps that are easy to make if you simply don’t know better. Here are some common “don’ts” you need to understand before you sign the paperwork on your new auto loan.

1. Extending the loan term

While choosing a longer loan term will reduce your monthly payment if you qualify for an interest rate that’s the same or lower than your original loan, it will also cause you to pay more total interest over the life of the loan.

For example, if your original auto loan was $65,000 at 3.99% interest and you refinance the remaining $45,000 on your auto loan at 1.99% for four years, you’ll save $4,502 over the life of the loan. Extend the term to seven years and you’ll save $3,134 over the life of the loan, which reduces your savings by $1,368.

Think carefully before agreeing to a loan with a longer term. Consider your car’s condition, mileage and age when choosing a new loan term. While it may be tempting to focus on the lower monthly payment, you could end up making a car payment in addition to paying for expensive repairs and extensive routine maintenance.

2. Waiting too long to make a move

When it comes to getting a better interest rate and more favorable terms on your auto loan, now is the “right time.” Every payment you make at an interest rate that’s higher than you could qualify for with another lender is a waste of money.

When is the right time to refinance an auto loan?

If your credit score has gone up since you got your original auto loan, you don’t like your current lender, you want a shorter or longer loan term or interest rates have fallen, go ahead and shop around. If you’re struggling to make payments, you should also consider trying to refinance.

Even if you’ve already refinanced your auto loan, you should do so again if it’s in your best interest and you can qualify for a loan with better terms. There’s no limit on how many times you can refinance a car.

If your loan is brand-new, it’s all right to refinance right away. There isn’t a law stating how soon you can get a new auto loan to replace your old one. You can refinance your auto loan as often as you can find a lender to approve your application.

Be aware that there are some hidden costs to refinancing like possible prepayment penalties and new origination fees. When you are shopping around, be sure to get a good idea of all the fees and requirements that might impact your bottom line. Before you opt for refinancing, be sure you do your homework.

3. Not talking to your current lender to learn about your options

Another common mistake that people make when refinancing an auto loan is not talking to their current lender. In many cases, your current lender can help you figure out a good option for your financial situation.

The best thing to do is pick up the phone and talk to someone at your lender. This is especially important if you are about to fall behind on your payments. You may be eligible for a loan modification that could extend your loan term to reduce your monthly payments. Some lenders will add missed payments on to the end of the loan to help you stay on track with future payments.

While it’s rare, your lender may also agree to reduce the interest rate on your auto loan, especially if your credit score has improved since you bought your car and if you have made your payments on time.

If refinancing with your current lender isn’t an option, research potential lenders carefully. Check auto refinance company TrustPilot scores and take a look at the consumer reviews on the Better Business Bureau (BBB) website. You can compare rates by using LendingTree’s refinancing page here. Simply fill out the online form and you may be matched with up to five different loan offers from lenders based on your creditworthiness.

4. Not understanding your current loan

You’ll find your loan terms in the disclosures section of your loan document. Federal law requires lenders to give customers easy-to-understand information about their loan’s fees, interest rate and total cost of borrowing the money.

If you can’t find your paperwork and you are having problems accessing the information about your loan on your lender’s website, call their customer service department and ask for help. They should be able to email or mail you a copy of your loan disclosures right away. Or, they can help you find that paperwork via your online account.

Look for this information in your loan docs

To make the process of shopping around easier, gather the following information, which you can find in your loan paperwork:

  • Your lender’s full name, address and phone number
  • Your account number
  • The amount of your original loan
  • Your APR
  • Loan term
  • Your interest rate
  • Applicable fees (pay special attention to prepayment penalties)

5. Refinancing a car that’s too expensive

If you owe more than your car is worth, you may have what’s known in the world of auto lending as negative equity. It’s also sometimes referred to as being underwater or upside down on your vehicle loan. Look at your car’s Kelley Blue Book or NADA trade-in value to get an idea of whether you have negative equity in your vehicle.

In addition to being upside down, you may be lured in by a dealership’s promise to pay off your previous car, even though you owed more than it was worth. Dealerships sometimes include all or some of the balance of the previous loan in the new loan. Although a dealership may claim that they will pay off your loan, in fact, you’ll be taking on more debt since they often roll it into the new loan you’re taking on. This could mean that you’ll have negative equity right away on the new vehicle you’re getting into.

While it may be possible to refinance a car that you owe too much money on, you should consider your options carefully before doing so. It may be smarter to pay down the principal of the loan until the loan amount is equal to the car’s wholesale value. A new car loses about 20% of its value during your first year of ownership. So, even if you got a good deal on the vehicle, you may need to pay down the loan balance before considering a refinance.

6. Not checking your credit score

You may think your credit score has improved since you got your original auto loan, but the only way to find out is to get your score yourself.

Know your credit scores

Credit scores aren’t included with your annual free credit report. You’ll need to pull them yourself. There are many versions of the scores and it’s important to pull the right one. Your FICO credit score is a three-digit number between 300 and 850 that gives lenders a snapshot of your financial well-being. Many auto lenders use a specific version of your FICO credit score to determine whether they’ll approve your refinance application.

You can see your FICO score for free by registering for a Discover Credit Scorecard account, even if you aren’t a customer. LendingTree offers free access to your VantageScore 3 credit score, which is also used by some lenders to evaluate creditworthiness.

VantageScore credit score ranges:

781 to 850: Super prime

661 to 780: Prime

601 to 660: Near prime

500 to 600: Subprime

300 to 499: Deep subprime

Where your credit score falls will determine just how good your refinancing interest rate could be. It pays to keep close tabs on it.

7. Taking the first auto refinance deal you get

Like skipping the negotiation phase at the dealership, when it comes to financing and refinancing your auto loan, it’s crucial to make sure you get your best possible deal.

Negotiation and shopping around are time-consuming, but the savings is worth your time and trouble.

As mentioned above, talk with your credit union or bank to see if they can offer a special refinancing deal if you bring your auto loan to them.

How to compare auto loan refinance rates

The same way you shopped for your car and your original loan, you should compare auto loan refinance rates. One way to do this is by by filling out a single form on LendingTree where you may receive up to five offers from lenders, based on your creditworthiness. We’ve seen annual percentage rates (APRs) as low as 2.49% for those with great credit who selected the shortest term possible.

8. Giving up if your application is denied

There are many reasons why your application for auto refinancing may be denied by a lender. You have the right to know why it was denied, according to the Equal Credit Opportunity Act (ECOA). This law states that the lender must give you a written notice of the denial with the reasons they denied the application. The denying lender may send a letter telling you about your rights under the ECOA, and you’ll have to ask them to send you their reasons for denial within 60 days.

If you were denied an auto refinance loan because of information found in your credit files, the lender must tell you which credit reporting bureau supplied the information. You can then get a free copy of that report. If they used one of your FICO credit scores to make their decision, they must give you that score at no charge.

What to do if your auto refinance application is denied because of a mistake in your credit file

Alert the credit reporting agency right away via their dispute process. While you can complete the process online, the FTC recommends that consumers submit a dispute letter via certified mail.

According to the Fair Credit Reporting Act (FCRA), the credit reporting agency has 30 days to investigate the problem. If they can’t provide proof that the information is correct they must remove it from your credit file. If your dispute changes the information in your credit file, you are entitled to an updated free copy of the credit report. You can then reapply for your auto refinance loan.

Negative information reported correctly stays on your credit report for seven years. Bankruptcies stick around for 10 years.

What to do if your auto refinance application is denied because your credit card balances are too high

Credit scoring models place emphasis on your credit utilization, which is the amount of money you owe on revolving accounts compared with your total amount of available credit.

For example, if you have three credit cards with available credit of $500, $1,000 and $1,500 and your balances are $300, $800 and $1,300, you owe $2,400 across all of your cards. Your total available credit is $3,000. Your credit utilization is 80%.

If you can afford to reduce the balances on your credit cards, reapply after you reach a credit utilization of 30% or less, which is ideal according to VantageScore and Experian. This can help boost your score as well as improve your credit utilization score.

Your credit scores will change when the information on your credit file updates, which depends on the reporting schedules of your creditors.

The examples here aren’t all the reasons you may receive a denial letter from a potential lender. If you don’t get the interest rate you expect or the lender says they won’t handle your auto refinance, ask questions.

  • Was a credit scoring system used?
  • If so, which factors were most important?
  • How can I improve my application?
  • Why am I not eligible for the best terms?

Gathering this type of information will help you gain the knowledge you need to regroup, reapply and increase your chances of approval.

9. Not using an online auto refinance loan calculator to evaluate your choices

Use an auto refinance calculator that includes information about your loan balance, refinance amount, current balance, loan term, monthly payment, credit score range and interest rate. The only way to know if you are truly getting a better deal is to compare loans side by side.

Be sure to compare the annual percentage rate (APR) of each potential refinanced auto loan with your current loan’s APR. This is the cost you’ll pay to borrow the money, including fees and interest. Using an online calculator is a great way to get the answer in seconds.

Another way to compare rates is to use an online service like the one offered by LendingTree. You’ll fill out an online form and could get up to five offers from lenders, based on your creditworthiness, in just a few minutes. You can choose the lender, APR or payment that works best for you.

Be sure to take into consideration any prepayment penalties or fees you might need to take on in order to refinance as well. These will certainly impact the savings you could get by refinancing.

The bottom line: Avoid common refinance mistakes

You can avoid making some of these mistakes simply by shopping around for your auto loan refinance. It’s tempting to take the first deal that beats your current auto loan, but don’t fall for it. You can do the bulk of your auto loan shopping from your computer or phone, so take advantage of free online prequalification and LendingTree’s comparison tool.

Understanding your credit situation and staying on top of the information in your credit file will also help you sidestep many of the problems mentioned here. You can keep tabs on your VantageScore credit score and learn more about building good credit with LendingTree’s credit tools.


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