Car Loan Refinancing

Car Loan Refinancing- refers to replacing your existing auto loan with a new auto loan from a different lender.Car loan refinancing can help you get access to favourable repayment terms even when a loan is already in progress. When you choose to go for refinancing, you will get a loan with new features, benefits, and terms.

Reasons for car loan refinancing

Car loan refinancing can be very beneficial to a borrower in the following instances:

• For lowering interest rates: If you come across a new/refinancing loan option at a lower interest rate during the course of your existing car loan, you can choose this new option and lower the overall interest that you pay on your loan. All you have to do is pay off your current loan and approach the new lender. However, you should make sure that the prepayment penalty charged for your old auto loan is lower than the benefits offered by refinancing.

You can also consider refinancing your car loan if your credit score has improved over your loan tenure. When this happens, you may be eligible for a finer loan deal at a lower interest rate with better terms.

• For modifying your loan tenure: With auto loan refinancing, you can increase/decrease your loan tenure. This will ideally help you reduce your monthly payments. If you extend your tenure through refinancing, you can repay your loan over a longer period of time. This will help you decrease your EMIs. However, you need to remember that you may have to pay a higher amount in total (including your interest) at the end of your tenure.

On the other hand, if you refinance your loan to reduce the loan term, you will be able to clear off your loan quickly and decrease the interest amount that you pay for your loan. In this case, your EMIs may increase.

• For making modifications to a co-signer agreement: When you refinance your loan, you can add a co-signer or eliminate your existing co-signer. In case your present co-signer no longer wants to provide a guarantee for your repayment, then you can remove their responsibility by getting a new loan from a different lender.
• For changing the terms of your auto loan: At the time of applying for your current loan, you may have not been too happy with your loan offer. However, you may have settled for this loan as it might have been slightly better than the other options. If you stumble upon a more desirable auto loan with better terms related to late fees, hypothecation, insurance, application charges, etc., you may choose to refinance to enjoy these better features.

Key points to remember before refinancing your auto loan

Before you decide to go ahead with refinancing your present auto loan, you can check the following factors associated with car refinancing:

• Prepayment charges: If you choose to refinance your loan, you will be required to prepay your existing loan. In most cases of prepayment, you will be asked to pay a penalty. This penalty can range from 1% to 3%, depending on your lender. Whether you want to refinance your loan for a more affordable interest rate or for better loan terms, you will have to assess the prepayment charges and see if they are lower than the benefits that you will gain from refinancing.
• Depreciation in the value of your car: Assume you bought a new car with a car loan. By the time you think of refinancing this loan after a certain period, the value of your car would have come down slightly. Most lenders may not agree to refinance automobiles if they are very old. Even if they do agree, you may not be able to avail a very good loan deal.
• Lender’s reliability: When you are thinking of refinancing your loan, ensure that you choose a trustworthy lender that offers dependable services. You should avoid finalising on a lender just because it offers a lower interest rate. You can evaluate a lender’s reputation by enquiring among friends and family and by doing online research about the lender.
• Additional charges: When you go ahead with refinancing, you will have to apply for a new loan from a new bank. This will require you to pay processing fees and certain other charges. You will need to assess how much these charges are before you actually decide to refinance your auto loan.

When to keep away from refinancing?

It is a good idea to avoid car loan refinancing in the following circumstances:

• When you have paid a major part of your current loan: If you wait for very long to refinance your auto loan, you may not save much on interest. You would have already paid off a major portion of the interest of your loan at the beginning of the tenure.
• When refinancing fees exceed the advantages: Before you refinance your car loan, assess the fees that you may have to pay for this procedure. In case you have to pay a high pre-payment penalty or a high processing fee, check if you can afford it. If paying such heavy charges does not make sense, it is better to not go for refinancing.
• If you are planning to apply for new credit: In case you have been planning to apply for a new credit card or a new loan, you may want to avoid refinancing your auto loan. This is because refinancing could affect your credit score negatively.

Car loan refinancing is a good idea if you get a better interest rate or if you get better loan terms due to an improvement in your credit score/financial condition during your current loan tenure.

Do keep in mind that you will not be able to refinance your existing loan within the same bank. Refinancing is typically done by applying for a new loan from a new lender. In case you do want to stick to your old lender, you will have to go for a top-up loan or pre-close your existing loan and apply for a different loan from the same bank.