Do’s And Don’ts Of Refinancing A Car Loan
You know refinancing your car loan is an option for improving your finances. But, is it always a good idea? If it is, are there right and wrong ways to go about it?
Let’s get you started on the right path to refinancing your car loan. Here are the top three do’s and don’ts to consider before signing on the dotted line.
What To Do When Refinancing A Car Loan
Here are three quick tips to get you on the road to refinancing your car loan:
1. Know your credit score
US consumers have a free weekly credit report at their disposal by the three credit reporting agencies, Experian, TransUnion, and Equifax. This offer is good through April 20, 2021, and can be accessed when you visit annualcreditreport.com.
Knowing your credit score positions you for the best refinancing car loan program that can lead you to tip number two …
2. Lower interest rate or payment
Check with your current lender and see if they can get you a lower rate. It’s also in your best interest to look at other lender’s rates. Many credit unions offer very competitive interest rates, so that’s a great place to start.
3. Compare car loans
Freedom Credit Union has a car payment calculator for you to compare your purchase options for buying a car versus leasing one.
Every financial institution that offers a low monthly payment doesn’t necessarily have a low-interest rate. You have to take into account the car loan balance that’s up for refinancing, the interest rate, and the length of the loan.
Using a car payment calculator enables you to verify the lender’s offer (including hidden fees) and comparison shop to yield the best option you can afford.
What Not To Do When Refinancing A Car Loan
Refinancing your car loan is all about positioning yourself to make the right decision. This starts with your credit history.
Yet, this doesn’t happen without you being aware of the pitfalls of refinancing your loan. Don’t get taken advantage of because you’re seeking financial relief and don’t believe you have opportunities to secure credit. Before you fall prey to any of the three tips below, feel free to research a company and its car loan practices with the Better Business Bureau.
1. Fall for scams
There are refinancing car loan scams that promise to lower your monthly payments and not be upfront with the interest rate details. Don’t fall for lower payments if it brings higher interest rates, which will elevate your monthly payment versus lowering your current monthly payment.
2. Quick fixes to credit history
What sounds like a good idea that involves a quick fix to your credit history is a red flag. Credit history repair is like a turtle, slow and steady, and it involves you being attentive to paying down your debt. Credit repair cannot be fixed or cleaned up by an outside company.
3. Loan rate exceeds car value
In general, it’s not recommended to refinance a car loan if the loan exceeds the total value of your car. This is called negative equity or in auto lending as upside-down or underwater on your car loan. Per Lending Tree it is “possible to refinance a car that you owe too much money on, [but] 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.”
Car Refinancing FAQs
You can never have too many questions when it comes to your finances. Here are a couple of questions and answers about refinancing a car loan to help put your mind at ease before you begin the process.
When applying to refinance my car loan why was there a dip in my credit score?
According to the credit reporting agency Experian, that dip in your credit score is called a hard inquiry. Each hard inquiry causes a slight dip in your credit rating. That request to check your credit is only listed on your credit report for a year before it disappears.
As long as I make payments to clear my debts, isn’t that better than not making payments?
Our friends at Experian want you to know that your payment history accounts for 35% of your FICO Score. FICO computes your credit history into a scoring system that determines how much or little credit you can receive.
A missed payment isn’t good, so several missed payments don’t allow you to have the best credit options available when applying for credit. Your credit report loves timely payments versus a history of excessively late or no payments at all.
Ready To Refinance Your Loan?
Now you know the dos and don’ts of refinancing a car loan; you should have a good sense of whether it’s right for you or not and if this is a good time to move forward with refinancing.
If you’re ready (and excited), click the button to learn more about your loan refinancing options: