The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
If you are having trouble making your current loan payments, refinancing — replacing your current auto loan with a new one — can be a great way to save money and remain behind the wheel of your vehicle. But there are some common mistakes to avoid to ensure you don’t end up in yet another precarious financial spot.
Top 7 car refinancing mistakes
Avoid these common pitfalls when refinancing your vehicle loan.
1. Not checking refinancing requirements
Lenders hold specific requirements when it comes to refinancing. Be on the lookout for criteria around the vehicle’s age, miles and even the amount you have left on the loan. For example, lenders often require a minimum of six months paid on your loan and a remaining balance between $3,000 to $5,000 to refinance.
2. Not checking with your current lender first
While your current lender might not have the most competitive rates, it is still the best place to start. Before exploring refinancing options outside your current lender, it is wise to reach out and explain your situation to see if they can help. Some lenders offer loan modification, which changes the terms, payment due date or interest rate to provide borrowers with financial relief.
3. Extending your loan term too much
Refinancing aims to save money, but if you extend your loan too much, you could spend more money over the loan’s lifetime. While a longer loan term will mean a lower monthly payment, you will also pay more interest.
4. Not considering your credit
As with most cases regarding financing, your credit serves as the main factor for approval. So, work to improve and build your credit before refinancing your loan. You’ll be more likely to receive the most favorable terms available and walk away with a better loan overall. A credit score of 670 or higher typically qualifies borrowers for the best interest rates.
5. Only shopping with one lender
Just as you would when shopping for your initial auto loan, we recommend comparing at least three different lenders. So, while signing off on the first loan offer may be tempting, not all options are created equal. Ultimately, the lower your interest rate, the more you’ll save on your car payment. You want to ensure you’re getting the best offer out there.
6. Becoming upside down on your loan
Before refinancing, check where the equity of your vehicle lies with a negative equity loan calculator. Equity is the amount by which the vehicle’s value exceeds the amount you owe on the auto loan. If you owe more than your car is worth, or hold negative equity, refinancing is likely not a good idea.
7. Giving up after your first rejection
Auto loan refinancing requirements vary from lender to lender, so just because you were rejected by one doesn’t mean you’ll be rejected by all. If you’re wondering, “Why can’t I refinance my car?” you have the right to ask the lender under the Equal Credit Opportunity Act (ECOA). They must tell you why your application was denied.
The bottom line
While refinancing your car loan can come with risks, it is a great way to lower your monthly cost and continue affording your vehicle. Keep these common mistakes in mind and stay up to date on current refinancing rates to ensure you walk away with the best loan for your needs.