Car Loan Refinancing

Refinancing refers to the process of paying off an existing loan by getting a new loan from a new lender. There are plenty of reasons why people do this. People generally do this for various reasons such as to get lower interest rate, to reduce their monthly payments, to extend the loan term, etc. When it comes to car loans, refinancing is a viable option if you are in need of any of these requirements. Car loan refinancing can help borrowers get access to favourable repayment terms even when a loan is already in progress.

Reasons for car loan refinancing

The exact reason for refinancing may vary from one person to another. It could be something like taking advantage of a better interest rate in the market or something as simple as removing a co-signer from an existing loan. Let’s discuss the specific scenarios in which car loan refinancing can be helpful for a borrower.

Lower interest rate - Most car loan products in the market have a fixed interest rate. Though floating interest rate is also available in the market, they are not among the most common forms of car loans. Let’s assume that you have taken a car loan with 11% fixed interest rate for a period of 5 years. After one year of repayment, you come across another loan product for 9.5% interest rate. You can take refinancing to pay off the existing loan and get a better deal from the new loan. One important thing you should be cautious about here is the prepayment penalty associated with most car loans. If this penalty is lower than the benefits obtained through refinancing, you can go ahead with it.

Lower monthly payments - This is another common reason for refinancing. During the course of loan repayment, the monthly payment capability of the borrower may get affected. In that case, the monthly repayment amount can be lowered by extending the loan term. Though you can extend the loan term to bring down the monthly instalment amount, the overall cost of a loan may increase in this process. You may opt for this as a last resort only when there is no other way to boost your monthly payment capability. If you can negotiate a lower interest rate while extending the loan term, it would be an added advantage.

Removing or adding a co-signer - Car loan refinancing gives borrowers the opportunity to remove or add a co-signer in the loan documents. In auto financing, co-signers are typically required only when a borrower fails to qualify on his or her own. Co-signers have the obligation of repaying a loan if the borrower fails to do so. In case you want to relieve someone from this responsibility, you can do so by taking refinancing with another lender in the market.

Changing terms of a loan - When a lender offers car loan, it typically comes with a lot of terms and conditions. There are specific terms with regard to hypothecation, late fees, application charges, prepayment penalty, security, insurance, etc. These terms may vary from one lender to another. At the time of taking a loan, certain conditions may not have been acceptable to the borrower. Yet, the borrower may have taken the loan because it would have been comparatively better than the other ones. If there is a new loan product in the market with better terms, people opt for refinancing to take advantage of these new terms.

Is refinancing possible within the same bank?

There are situations where you might need refinancing, and you might like to do it within the same bank since you are comfortable with the existing process. The key thing to note here is that it is not possible to refinance an existing loan within the same bank. However, you can consider other options like taking a top-up loan on the existing loan. There is also the option of pre-closing the existing loan and taking a new loan with the same bank. Refinancing is typically done by applying for a new loan with another service provider in the market.

Things to note while refinancing

Car loan refinancing can be done for any of the above mentioned reasons. While refinancing, people often look for benefits with regard to overall cost or payment terms of the existing loan. When you decide on refinancing, you may have to check the following factors to ensure that refinancing works to your advantage.

• Prepayment penalties: This is the most important thing to consider before you decide to proceed with refinancing. There are prepayment penalties when you foreclose the existing loan. Depending on the lender, the penalty may vary from 1% to 3% of the outstanding loan amount. If you are refinancing mainly to benefit from lower interest charges, you may have to calculate the penalty charge first and compare it against the interest rate benefits you are likely to experience.
• Processing fees and other charges: While it is possible to get competitive interest rates during refinancing, there may be certain other charges that could offset this benefit. When you take a new loan from another lender, it generally comes with additional charges and processing fees. Make sure that you have taken this into account before deciding to go with car loan refinancing.
• Depreciating car value: The value of a car depreciates over time. You may have taken a loan for purchasing a new car. By the time you are considering refinancing, the insured declared value (IDV) of the car may have reduced significantly. Since the value of the vehicle has depreciated, the terms offered by the new lender may not be as good as you expected. It is better to consider refinancing only if there is a significant advantage in terms of interest rate or repayment term.
• Reputation of the lender: While interest rate and loan terms are the main focus of refinancing, reputation of the lender is one factor that must not be overlooked. In most cases, exceptional service quality comes with a price tag. It is not a wise idea to end up with a lender notorious for poor service just because the interest rate is cheaper. The reputation of the new lender is not a difficult thing to check. You can check the online reviews to know whether the quality of service provided by a lender will be suitable for you.

Benefits of refinancing

Borrowers can witness a lot of benefits through car loan refinancing if it is done right. The main advantage with refinancing is the possibility of having many flexible options. With refinancing, you can get lower interest, extend the loan tenure, shorten the loan tenure, or choose new terms. If you are facing financial difficulties with monthly payments, refinancing could help you improve your financial situation. In most cases, the process associated with refinancing is quite straightforward. Hence, if you are in dire need to improve the terms of your existing loan, you can consider refinancing and take advantage of the benefits offered.

When should you avoid refinancing?

While there are considerable benefits associated with refinancing, there are situations where you may have to refrain from it. If you are facing any of the following situations, you may have to think twice before applying for car loan refinancing.

If you are applying for another loan: When you apply for refinancing, it will be marked in your credit score as an inquiry. Multiple loan inquiries in a short term will bring down your credit score. If you are on the verge of taking a large loan (e.g. home loan), it is not the best time to refinance your car loan. You might end up paying a higher interest rate on your bigger loan if your credit score declines during this time.

If the terms of refinancing are not satisfactory: It goes without saying that there must be some sort of advantage when you take refinancing on your car loan. If the terms of the new loan are not benefiting you in any way, there is no point in proceeding with this option. If you still proceed with refinancing, you might get stuck with a loan that has higher monthly costs and longer repayment tenure. It is not a good idea to look for temporary relief when you are planning to take car loan refinancing.

Conclusion

Car loan refinancing is a viable option that could bring a lot of benefits and flexibility for a borrower. However, it is better to take this option only when there is an absolute requirement. Most importantly, the terms of the new refinancing loan must be favourable. When you opt for refinancing, make sure that the new loan is not costlier than the existing loan. If there are considerable benefits to be achieved, refinancing is certainly an option worth considering.