Mistakes to avoid when refinancing your car loan

Imagine a scenario wherein you are cruising along the roads of the Philippines, but you suddenly feel a bump, not on the road but in your mind. It is your car loan worry that is to be blamed, it is no less than a speed bump that popped up in your otherwise smooth financial journey. What to do now, what’s the remedy to soothe your worry? The answer to this question can be found within the lanes of ‘Car Loan Refinancing’.

What is car loan refinancing?

Car loan refinancing is a makeover you give to your current car loan. Here, the existing loan is swapped for a new loan with better terms. Picture it like trading your old car for an attractive, shiny new car.

Also Read: A step-by-step guide to refinancing your car in the Philippines

What is the need to refinance your car loan?

 

At first, it might seem like a crazy idea, but car loan refinancing has its own set of perks. A few of them are listed below -

Lower monthly payments: Think of it as having a little more cash in your pocket each month, which you can spend on shopping or use as savings for your next big purchase!

Better rate of interest: So if your previous loan comes with a high-interest rate, then refinancing is a great option to optimize the deal. This finance tool will swoop in and rescue you with a lower interest rate on your car loan. Meaning, that you’ll end up paying less interest over the entire life of the loan, thus leaving you with more pesos in your pocket.

Extended loan terms: Sometimes, borrowers need a little more time to repay the loan they have acquired but without feeling the pinch. Enter refinancing, as it can extend the loan term, too. This results in more manageable monthly payments and allows you to meet other essential expenses without any stress.

Helpful in emergencies, the above-listed points make refinancing a great tool to tackle sudden adverse changes. For instance, you have taken up an auto loan for a car that you wish to use to go to work and take trips with family, but then, sadly, you lose your job, and the loan is still due for repayment. In such a financially vulnerable situation, refinancing comes in as a great tool. It not only gives the borrower more time to pay off the loan but allows better management of the finances.

 

Car loan refinancing mistakes to avoid

After discussing car loan refinancing and its benefits in detail, it is time to shed light on the mistakes that should be avoided when refinancing a car loan in the Philippines.

Not having a word with your lender

When you are in a tough financial spot, one of the best things to do is pick up the phone and have a conversation with your car loan lender. We say so because leaders sometimes offer penalty fee waivers, deferrals, and other options to help you with your problem. While these are short-term solutions, lenders can even give you a refinance offer for a long-term solution.

In case refinancing feels like the best option, a borrower needs to get quotes from multiple lenders.

Focusing only on monthly payments

Lower monthly payments might seem appealing, but they could also mean a longer loan term and more interest paid in the long run. A longer loan term means the borrower will pay more in total interest over the life of the loan. While lower monthly payments might seem tempting, however, experts suggest maintaining a balance and focusing on maximizing total auto refinance savings.

Just like a car loan repayment calculator, there is an auto refinance calculator that helps borrowers run the numbers.

Choosing the wrong term length

Shorter loan terms usually mean higher monthly payments but lower overall interest costs. Longer terms, on the other hand, might offer lower monthly payments but could cost you more in the long run. Pick the term length that fits your budget and financial goals.

Overlooking interest rates

A lower interest rate can save you thousands of pesos over the life of your loan. Don't overlook this crucial factor when refinancing—shop around for the best rate you can find.

Not looking around much for lenders

Each borrower is different, and each borrower has a unique style of analyzing the risk and forming an offer. It is, therefore, advisable to go to different lenders, get multiple offers, and pick the best deal from the lot.

Refinancing an expensive car

If you are unable to release the stress on your budget even after refinancing your car loan, consider switching to a less expensive car. However, if a borrower owes more than the car’s worth, then negative equity can make refinancing hard.

Forgetting to check your credit history

A borrower’s credit score plays a big role in determining just how good an interest rate he/she can get on refinancing. Also, lenders use this score to determine your loan terms, so make sure yours is in good shape before applying for refinancing.

Skipping the Math

Refinancing can save you money, but only if you do the math first. Calculate how much you'll save in interest and fees compared to your current loan to make sure it's worth it.

Forgetting about fees and penalties

Refinancing isn't always free. Watch out for application fees, processing fees, and other hidden costs that could eat into your savings. Also, some lenders charge prepayment penalties if you pay off your loan early. Make sure you understand these penalties before refinancing to avoid any surprises down the road.

Not reading the fine print

We get it—reading through loan documents can be about as fun as a flat tire. But skipping the fine print could leave you vulnerable to hidden fees or unfavorable terms.

Not considering your financial situation

Refinancing isn't a one-size-fits-all solution. Consider your current financial situation, future plans, and any other debts or expenses before pulling the trigger. What works for someone else might not work for you.

Bottom line

Avoiding these mistakes to ensure a smoother refinancing experience and put your financial freedom on fast track mode. Happy refinancing!

Also Read: How to budget for your car loan repayment effectively