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Refinancing a car is the process of having your car loan paid off and replaced with a new one, often with a different lender, that has new agreed-upon terms.
There are various possible outcomes and, in many cases, it’s about saving money, though not always. Borrowers often look for a lower monthly payment, reduced interest rate or different loan duration, or a combination of these.
Reasons for car 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.
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.