Dear EchoBay Expert:

Dear Loyal Reader: Asking the right questions is the first step towards avoiding costly mistakes; so the fact that you're questioning what you should and should not be doing in regards to your auto refinance loan indicates that you're on the right track.

The biggest mistake you can make is to refinance a loan that is almost paid off. At the end of a car loan, most of the payment is going towards principal, whereas at the beginning, the majority of it is going towards interest. If you refinance when your car loan is almost paid in full, it's like starting at the beginning again and throwing away all of your hard work.

You'll also want to make sure that you don't extend the term of your loan over the longest period possible just to keep your monthly payments low. It's important to keep your loan to the shortest term possible while still being able to afford your monthly payments.

The longer your loan term, the more interest you will pay and the more likely you will be to fall victim to the "upside down" scenario, a situation where you want to sell your car but can't because you owe more money on it than what it's worth.

Also make sure the loan you're applying for doesn't come with any prepayment penalties attached to it. If you wind up paying your loan off early, you don't want to have to take a hit to your pocketbook. Also verify that when you refinance, the interest rate on the loan isn't a variable rate.

If you refinance at a variable rate and interest rates rise, you might wind up paying more than you would have with your original car loan.

Dear EchoBay Expert:

Dear Loyal Reader: Bad things happen to even the best of people, and just as financial situations improve, so do bad credit scores. Whether or not you'll be approved for a bad credit auto refinance loan will largely depend on what's been going on with your credit for the past two years.

If you've been paying off old debts and paying your bills on time, your credit score has probably improved a great deal and that can mean a much lower interest rate for you. Even if your credit has just improved slightly, you can still benefit from a 1 to 2 percent drop from your current interest rate.

If your credit is in pretty much the same shape it was when you were first approved, but interest rates on bad credit car loans have dropped, you may still be able to refinance at a lower rate. Even an interest drop of as little as 2 percent can mean big savings over the life of your loan.

For example, if you have 48 months left on your car loan and you refinance a $10,000 balance at a 9 percent interest rate, down from an 11 percent interest rate, you would save more than $450 over the life of your loan.

To get the best chance of being approved for a lower interest rate, you'll want to make sure that your credit report is accurate, that you pay down your outstanding debt, and if your credit is still in not-so-great shape, work with a lender that specializes in borrowers who have problem credit.