Pitfalls to avoid when refinancing auto loan in the Philippines

Auto loan refinancing can be an excellent option for many car owners in the Philippines, offering potential benefits like reduced monthly payments, lower interest rates, or more favourable loan terms. However, refinancing has its pitfalls, and navigating these mistakes is critical to ensure that it is the right financial move for the car owner.

But before discussing these common refinancing mistakes, let us first understand refinancing in detail.

What is auto loan refinancing?

Auto loan refinancing is the process of replacing your current car loan with a new loan from a different lender or the existing lender but under more favourable terms. Also, the new loan is typically used to pay off the balance of the original loan, and you then make payments on the new loan.

The primary goal of refinancing is to -

• Lower the interest rate
• Reduce monthly payments
• Adjust the loan term

Also Read: 4 Smart reasons to refinance your auto loan

When to refinance an auto loan?

It is ideal for a car owner to opt for refinancing when his/her financial situation has improved or if market interest rates have dropped since the applicant first took out the loan. Overall, refinancing will allow the owner to secure better terms, thus saving money in the long run.

Furthermore, refinancing can also be a solution if the car owner is struggling to meet current loan payments. By extending the loan term, the monthly payments are reduced, though may end up paying more in total interest over the life of the loan.

Auto loan refinancing Common pitfalls to avoid

Coming to the point, let us now discuss the most common pitfalls to avoid when refinancing your auto loan in the Philippines. By being aware of these traps, the applicant can make informed decisions and maximise the advantages of refinancing.

1. Ignoring hidden fees

One of the most common mistakes people make when refinancing an auto loan is not paying attention to the hidden fees that often come with it. While the promise of a lower interest rate may be tempting, make sure to read the fine print. Refinancing usually comes with administrative fees, processing fees, and sometimes even early repayment penalties from your original lender.

Keynote: Failing to account for additional costs can negate any savings you thought you were getting. Therefore, before signing on the dotted line, ask for a detailed breakdown of all fees associated with the refinancing deal.

2. Not checking the penalty for early loan repayment

Many auto loans come with prepayment penalties or fees for settling the loan earlier than the agreed term. If the original auto loan includes such penalties, refinancing may end up costing more than it saves. These penalties are typically a percentage of the remaining loan balance, and they can be substantial.

Keynote: It's essential to check the current loan contract for any prepayment fees and consider whether these fees will balance out the potential savings from refinancing. So, always compare the total cost, not just the interest rate, when deciding whether to refinance.

3. Focusing only on lower monthly payments

A common reason for refinancing is to reduce the monthly payment amount, which can provide immediate financial relief. However, focusing only on lowering your monthly payments can lead to long-term financial consequences. While spreading the loan over a longer period can lower your monthly obligations, it also means you’ll pay more in interest over the life of the loan.

Keynote: Before deciding to refinance for lower monthly payments, ensure you calculate the total cost of the loan. One might find that extending the loan term could result in paying more overall, even with a lower interest rate.

4. Not shopping around for better rates

One of the biggest mistakes people make when refinancing is failing to shop around. Many borrowers stick with their original bank or financing company, assuming they will offer the best refinancing deal. However, other financial institutions may offer better rates or more favourable terms.

Keynote: The Philippines has a highly competitive loan market, with banks, credit unions, and other lenders offering various refinancing options. Take the time to explore your options, compare interest rates, and negotiate the terms. Doing so can result in a better deal and greater savings.

5. Failing to improve credit score

Credit score plays a crucial role in determining the interest rates and terms an applicant is offered when refinancing your auto loan. When a car owner has a poor credit score, they are less likely to receive favourable refinancing offers. Worse, they might end up with a higher interest rate than your current loan.

Keynote: Before applying for refinancing, the applicant should check his/her credit report and take steps to improve the score if necessary. This might involve paying off existing debts, avoiding new debt, and correcting any errors on your credit report. A better credit score will give leverage to secure lower interest rates.

6. Refinancing too soon

Timing is everything when it comes to refinancing an auto loan. If a car owner opts to refinance too soon after taking out the initial loan, he/she may face penalties or fees that outweigh the benefits. Additionally, some lenders may be less willing to offer favourable terms if the loan is relatively new.

Keynote: If an applicant waits too long to refinance, he/she may miss out on the opportunity to save on interest. The best time to refinance is when the credit score has improved, and interest rates are lower than when the applicant took out the original loan.

7. Overlooking loan tenure & total interest costs

When refinancing, it's easy to focus on the immediate benefits, such as lower interest rates or monthly payments. However, many borrowers overlook the total interest they’ll pay over the life of the new loan. Extending the loan term may reduce monthly payments, but it also means you'll pay more in interest over time.

Keynote: Always calculate the total cost of the loan when refinancing. Compare the total interest you’ll pay with your current loan versus the refinanced loan to determine if the deal truly saves you money.

8. Not reading the fine print

Auto loan agreements can be complex, with terms and conditions that may be easy to overlook. Failing to thoroughly read the fine print before signing a refinancing agreement is a significant pitfall that many borrowers fall into. Key details, such as interest rates, fees, and repayment terms, may not always be highlighted in the main sections of the contract.

Keynote: Before agreeing to refinance, carefully review all the loan documents. If anything is unclear, ask for clarification from the lender or consult with a financial advisor to ensure that you will not agree to unfavourable terms.

9. Failing to consider the Loan-to-Value ratio (LTV)

Another factor that many car owners overlook when refinancing is the loan-to-value ratio (LTV). LTV is the ratio of the amount the car owner owes on the loan to the current market value of the vehicle. If the car has depreciated significantly since its purchase, the LTV might be too high to qualify for favourable refinancing terms.

Keynote: Many lenders in the Philippines have strict LTV requirements, and a high LTV can lead to higher interest rates or even disqualification from refinancing. Ensure that your car’s value justifies the refinancing decision.

10. Neglecting to factor in depreciation

Cars are depreciating assets, meaning they lose value over time. As the car ages, its value decreases, which can impact the refinancing process. If the value of the car has dropped significantly, the owner may owe more on the loan than the car is worth—a situation known as being “underwater” on your loan.

Keynote: Refinancing an underwater loan can be risky, as it may result in higher interest rates or less favourable terms. It’s essential to consider the current value of the vehicle and how its depreciation affects your refinancing options.

11. Failing to consider insurance premiums

Another hidden cost when refinancing your auto loan in the Philippines is the impact on your car insurance premiums. In some cases, extending the term of the loan could mean that the car owner will need to maintain comprehensive insurance for a longer period. This can increase your overall costs, particularly if the vehicle is old and no longer requires full coverage.

Keynote: Be sure to factor in any changes to the insurance premiums when deciding whether to refinance the auto loan.

12. Overestimating financial stability

Refinancing is often pursued to lower monthly payments or reduce interest rates, but it’s crucial to assess one’s long-term financial situation before making any decisions. Unexpected changes in income, health, or family circumstances can affect an applicant's ability to make future payments.

Keynote: An applicant must consider his/her financial stability and plans carefully before committing to a new loan. However, if the applicants are uncertain about their future, they may want to delay refinancing until they have more stability.

13. Skipping professional advice

Auto loan refinancing can be a complex process, especially if the applicant is unfamiliar with financial terms and conditions. Many borrowers make the mistake of navigating this process alone, without seeking professional advice.

Keynote: Consulting with a financial advisor or loan expert can help one understand different options and ensure that refinancing is the right move for the given situation. An expert can also help avoid common pitfalls and negotiate better terms with lenders.

14. Falling for false lenders

Unfortunately, the loan market in the Philippines is not immune to predatory lending practices. Some lenders may offer refinancing deals that seem too good to be true, only to trap borrowers with hidden fees, exorbitant interest rates, or unreasonable terms.

Keynote Be: cautious of lenders who pressure you into quick decisions or offer terms that seem overly favourable. Always research the reputation of a lender before entering into any agreements and avoid dealing with those who have a history of unethical practices.

15. Not setting realistic expectations

Finally, one of the biggest pitfalls when refinancing an auto loan is not having realistic expectations. Refinancing may not always lead to significant savings, and it’s important to understand that the benefits depend on a variety of factors, including your credit score, the value of your car, and current interest rates.

Keynote: Take the time to evaluate your current loan, assess the market, and set realistic goals for refinancing. Doing so will help you make a more informed decision and avoid disappointment.

Bottom line

Auto loan refinancing can be a smart financial move for car owners in the Philippines, offering the potential for lower interest rates, reduced monthly payments, and more manageable loan terms. However, it is not without its risks. By avoiding common pitfalls—such as ignoring hidden fees, overlooking prepayment penalties, or focusing solely on lower monthly payments—you can make refinancing work in your favour.

Also Read: Car loan scams in the Philippines: Applicants be aware