Common Car Refinancing Mistakes
Refinancing your auto loan can help you get out of a sky-high payment or interest rate, but some pitfalls in the refinancing process could have you paying more than necessary. Here are some common car refinancing mistakes and how you can avoid them:
6 mistakes people make when refinancing an auto loan
1. Extending the loan term
The longer the loan term, the more you will pay in total interest over the life of the loan. While it may be tempting to focus only on securing a lower monthly payment, it’s best to balance that with maximizing your total auto refinance savings. Here’s an auto refinance calculator to help you run the numbers.
2. Not talking to your current lender
If you’re in a tough financial situation, one of the best things to do is pick up the phone. Lenders will sometimes offer deferrals, penalty fee waivers and other options that could help you if you have a short-term problem. They may also be willing to give you a refinance offer if you have a longer-term problem or goal.
Remember that if refinancing is your truly best option, it’s vital to get quotes from multiple lenders. It doesn’t hurt your credit to apply to multiple lenders any more than it does to apply to one. Here are the best auto refinance companies.
3. Accepting the first auto refinance offer
Every lender has its own method of judging risk and will likely give different offers. By getting multiple offers, you’ll have your choice and can pick out the best offer for you. You can fill out a single form on LendingTree where you may receive up to five offers from lenders, based on your creditworthiness.
4. Refinancing a car that’s too expensive
If a refinanced car payment would still stress your budget, consider trading in your vehicle and getting a less expensive car. Here’s a guide on how to determine whether to trade in or refinance your car.
If you owe more than your car is worth, negative equity can make it hard to refinance. It may be smarter to pay down the loan balance before taking the next step.
5. Not checking your credit history
Your credit score is a big factor in determining just how good your refinancing interest rate could be. If it has improved since you got your original auto loan, you may qualify for a better APR on your refinance loan than your original car loan. Check your credit score for free with LendingTree Spring.
You should also check your credit report at AnnualCreditReport.com to ensure that there are no mistakes dragging your score down.
According to the Fair Credit Reporting Act (FCRA), the credit reporting agency has 30 days to investigate a reported inaccuracy. If the disputed information cannot be proven to be correct, the agency must remove it from your credit file. If there is a correction, you are entitled to ask for two things: One, a free, updated copy of the credit report and, two, for the agency to send notices of correction to anyone who requested your credit report within the last six months.
If your credit report is accurate but your score isn’t very high, there are lots of ways to improve your score. Taking the time to improve your credit score can result in auto loan offers with lower APRs and more favorable terms.
6. Giving up if your application is denied
There are many reasons why a lender may deny your application for auto refinancing.
Under the Equal Credit Opportunity Act (ECOA), you have the right to know why it was denied. If you don’t get the interest rate you expect or the lender says it won’t handle your auto refinance, ask questions.
- 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.
Frequently asked questions
The right time to refinance a car is when doing so would help you. Refinancing may be a good idea when your credit score has gone up, when you want a different term, when you want a smaller payment or when interest rates have fallen. You can read more about when to refinance your car and when to wait.
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. If you can afford to reduce the balances on your credit cards, do so and reapply after you reach a credit utilization of 30% or less, which is ideal according to VantageScore and Experian. This can help to boost your score and improve your credit utilization score.
First, determine whether car refinancing will help you, then collect your documents and apply to a few lenders. Compare the offers you receive and accept the best one. Here’s a full guide on how to refinance your auto loan.
You may be able to get a cash-out refinance on your car, but there are pros and cons to consider before doing so. Often, taking a cash-out auto refinance loan will mean a longer loan term, which will increase your total cost of borrowing.