Vehicle refinancing can be a smart financial move for South African car owners looking to save money on their monthly payments or reduce their interest rates. On the face of it, this sounds great, but as good as it sounds (especially if you’re struggling to keep up with your current car payments), vehicle refinance is not always the best option for everyone.
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There are a number of factors to consider and implications to weigh up when thinking about refinancing your car. For instance, if you don’t do your homework, you may have to pay a pre-payment penalty if you refinance and pay off your current car loan early. You may also have to pay additional costs for taking out a new loan, like administration charges and vehicle inspection fees. It could even negatively affect your credit score.
Your secret weapon is knowing what the most common mistakes are around refinancing your car loan. Mistakes that could end up costing you more money in the long run.
Let’s explore these mistakes so you can avoid them for yourself, and make the most informed decision.
Vehicle Refinancing Mistakes To Avoid
Not Shopping Around For The Best Rates
One of the biggest mistakes that car owners make when refinancing their car loans is not shopping around for the best rates. It’s important to compare rates from multiple lenders to ensure that you’re getting the best deal possible. Many car owners make the mistake of simply refinancing with the same bank they have their current loan through, without exploring other options.
The reality is that by not shopping around, you’re likely to miss out on better rates and terms that could save you money in the long run.
Extending The Loan Period
Another common mistake that car owners make when refinancing their car loans is extending the loan term. The temptation is to extend the loan period in order to make your lower monthly payments lower. In reality, what you’re doing is increasing the total amount of interest paid over the life of the loan. You should balance your ability to afford your payments with as short a loan period as possible so that you can save money on interest.
Not Checking Your Credit History
Before you go down the refinancing road, we urge you to check your credit history. You’re specifically looking to make sure that your credit history is accurate and up-to-date. Through AA Inform you can get your hands on a free credit report, emailed to you instantly. This will give you access to your payment profile, judgments, debt review flags, your credit score, possible fraudulent info. Importantly you can take action to increase your score and improve your risk profile.
A poor credit score can result in higher interest rates and less favourable loan terms. By checking your credit history before refinancing, you can correct any errors and improve your credit score, which can result in better loan terms and lower interest rates.
Click here to get your free credit report.
Not Considering The Total Cost Of Refinancing
This is a fairly surprising mistake, but it happens more often than you think. What happens is that people get overwhelmed by all the info around the new terms, what it means to close the old loan, and the myriad of documents that need to be signed… it’s easy to see how all the different fees and charges can be overlooked. These additional costs that catch people unawares typically include application fees, origination fees, and pre-payment penalties.
It’s important to calculate the total cost of refinancing and compare it to the potential savings so that you can truly determine if it’s worth it to refinance your car.
Refinancing Too Often
While refinancing a car loan can be a smart financial move, it’s highly advisable to avoid taking this option more than once. Refinancing too often can be a mistake, what with the fees and charges that you’ll pay each time you refinance. These add up over time, but perhaps more importantly, every time you refinance, you’ll reset the loan term, which can result in paying more interest over the life of the loan.
Feel informed?
The truth is that refinancing your car can be a good option – particularly if you have a high-interest rate on your current vehicle loan. What it comes down to, though, is doing your homework. You’ll need to compare different offers so that you have a good picture of how the best refinancing deal competes with what you’re currently tied to. You may find that you’re offered a lower interest rate resulting in monthly payments, and even a more generous payment period.
However, it’s important to note that refinancing your vehicle may not be the best option if you have a low credit score or if you owe more on your car than it’s worth. You may also find that the interest rate is higher than what you’re currently paying. Added to that, there could be additional admin fees and a possible penalty for settling your existing vehicle loan early. While you’re here, don’t forget that AA Inform is home to a range of useful tools and resources, including articles on the best vehicle finance options and how to refinance your vehicle, as well as a Vehicle Refinancing Calculator which you can use to explore your options.
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