Common Refinancing Auto Loan Traps
Maybe you got stuck with a bad deal the first time around, and now want to refinance an outstanding auto loan for a lower interest rate.
Depending on your credit score, car value, and other relevant criteria, you may find an offer that suits your needs.
Still, just because the interest rate is lower, it doesn’t mean that you must accept refinancing options automatically.
It’s important to consider all possible advantages and drawbacks before moving on with the application.
Refinancing an auto loan might lead to you paying an increased amount at the end of the term or finding yourself neck-deep in even more debt.
Here are some traps that you need to be wary of:
Opting for a Longer Term
Refinancing for a longer term is one of the most common traps to be aware of.
Most customers who opt for refinancing an auto loan do not take into consideration the long-term implications.
The idea of paying lower interest overrides the tenure. For instance, you have an ongoing loan of $10,000 at an APR of 10% for a fixed period of 2 years.
On average, you will be paying $461.45 every month and a total of $11,074.78. So, for a term of 2 years, the total interest paid is $1074.78.
Now, the refinanced auto loan that you are opting for might agree to charge a lower interest rate and provide you a longer-term.
Yes, the monthly installments will be lower, but refinancing for a longer-term means you might also end up paying more interest over the life of the loan.
For instance, if you refinance the loan above at 5% with a new term of 5 years, your monthly installment will be $188.71, which while less than $461.45, means the total interest over the term will add up to $1,322.74. At the end of it, you ended up paying an additional $250, approximately.
Agreeing to an Upfront Fee Without Negotiating
Most lenders will charge a mixture of fees before refinancing.
This might include an origination fee, processing fee, setup fee, and many more.
When totaled, this can add up to several hundred dollars or even higher and most customers accept the upfront fees without any discussion.
Luckily, most lenders are open to negotiating the upfront fees. Some don’t even charge an upfront fee.
To properly negotiate, conduct research and find lenders that agree to waive the fees. Then, use these references as leverage to negotiate a better deal with a lender.
Piling Multiple Debts on a Refinancing
Another common trap that many customers are lured into is adding minuscule debts to the refinancing loan.
While rolling multiple small loans into a refinanced loan may seem like a great idea to pay off short-term debts, adding these small amounts to the refinancing loan’s principal (and stretching it for a longer period) means accumulating unnecessary charges that might be costly over time.
Rather than consolidating every debt into a single refinanced auto loan, it is almost always better to manage income and expenses efficiently and work on paying off loans with the highest rates first.
Falling for Discounted Rates
Discounts may seem attractive on balance but be wary of the fine print.
While you may see an advertisement highlighting an ‘introductory offer: lower interest rates”, it pays to be cautious.
This trap lures in customers by offering a massively discounted rate initially, then reverts to the standard variable rate which is sometimes higher than the average market rate.
The result: borrowers pay an extremely low-interest rate initially, then end up paying exorbitant rates till the loan term ends.
You can avoid falling into this trap by comparing the actual rates and not the advertised rates with other lenders.
If you’re thinking of refinancing an auto loan, it’s important to consider all available options.
Just because a lender is offering a lower rate, doesn’t mean it’s a great deal over the long term. Research as many lenders as possible and make detailed comparisons before committing to refinancing an auto loan.
That way, you get access to the very best terms that’ll actually improve your overall financial situation instead of harming it.