If you’re drowned in auto debts, you know what it takes to repay your multiple loans. Yes, it is your mid-loan crisis. You already have more than one car loan and want to repay all of them quickly without going bankrupt. You are stuck halfway repaying your auto loans. Then, you are looking for a consolidated auto loan and want to dig out of your debt as soon as possible. Your existing vehicle debts are bothering you because of the high rate of interest that you paid for the last 12 months drained your finances. Again, you may be stuck in an auto loan in which all things are wrong from hidden fees to poor warranties.
According to an article published on https://www.huffpost.com, you must consider a few aspects before taking out a consolidated vehicle loan. First things first, clean your finances before consolidation. It means stopping the use of your high-interest credit cards and sticking to a monthly budget. It will prevent you from overspending or using your credit cards unnecessarily. Building an emergency fund is one way to put some money aside every month.
Coming back to auto loan consolidation, you must not apply for the same without thinking. If you do so, you will make the same blunders and end up in a financial soup. Here are five blunders to avoid when consolidating your existing vehicle debts:
- Ignoring your credit score
When your credit score is already low while you took out your original loan, ignoring it further will prove detrimental to your interests. You have not checked your credit report since the time you have taken your original loans. Based on the findings of FICO, you will require at least a score of 720 to become eligible for a reasonable auto loan interest. Again, if you have improved your credit score, the interest will reduce, implying you would need to shell out less monthly payment as interest. Now, that is convenient if you have financial constraints.
However, if you have been ignoring your credit score and it dipped below 720, your chances of approval for an auto loan consolidation are bleak. If the score is 600 or less, it is difficult for you to convince lenders to refinance your existing vehicle debts and merge them into one single, convenient payment.
In such a situation, take some time and wait for your score to improve. Start making timely payments. Do not rush if you have a less than average score. You will end up wasting your money on loan application fees or approved for a consolidated vehicle loan that is only slightly better than your existing debts. It makes no sense.
- Not paying heed to LTVs and DTIs
When it comes to cars, they depreciate all the time. Based on the findings of Edmunds.com, your vehicle may lose up to 15 percent to 25 percent of its actual cost and that too in the first five years. It may disappoint you when you realize your new terms of the loan reflect the existing, depreciated value of your vehicles instead of the original value.
Many borrowers ignore to take the loan-to-value (LTV) into consideration, which is one of the greatest mistakes while applying for a consolidated auto loan. You feel it is a new car and fail to realize there are numerous aspects that have an impact on the value of your car. These factors are age, wear and tear, and car performance on the road.
Another factor to consider while taking a consolidated loan for your existing auto loans is the debt-to-income (DTI) ratio. Additionally, you can study websites like NationaldebtRelief.com to learn more about auto-debt consolidation tips and tricks.
- Extending the loan tenure for too long
It looks good on a document that your auto debt of 36 months is consolidated to 48 months or 60 months. You think that you have to pay less every month. Then, do you realize that you will need to pay more in interest, thus increasing your total loan cost?
We recommend that you avoid extending your loan tenure for too long unless you do not have the funds to make that monthly payment. If you think you will miss payments, only then you should extend your loan term, else not.
Your monthly payment will reduce but you will shell out more cash to the lender or bank throughout the tenure of the consolidated auto loan. It will drain your finances over the months. Therefore, avoid extending the term when refinancing your existing vehicle debts.
- Not paying attention to the interest rate
A short consolidated loan term with similar monthly interest and for that matter a high APR would help you save your hard-earned dollars when compared to a long-term loan with reduced payments. That is because most of these payments contain only one essential element, which is the rate of interest. Therefore, if you do not pay heed to the rate of interest and only think of low monthly payments, you will lose during the tenure of the consolidated auto loan.
Most people only focus on the monthly payments when consolidating their existing vehicle debts. They do not have the idea of how much of the amount constitutes interest. Choosing a consolidated loan for your vehicle debts with a shorter tenure will not only reduce your interest but also cut back on the total loan cost.
- Not researching on the best interest rates
Falling for the first interest rate available was your greatest blunder when applying for auto loans. Again, when consolidating your existing vehicle debt, avoid committing the same mistake. Take some time out of your busy schedule and look for lending websites and other online lenders for the best interest rates.
You can also research on the banks as well as credit unions near you. See what type of APRs they offer provided they specialize in auto loan consolidation. Do not forget to inquire about the rates of interest from your current lender.
Now that you know about these mistakes, and how to avoid them, merge your existing vehicle debts into a single consolidated loan. Pay less interest and become debt-free fast.