Refinancing is a common financial term, and can be applied to car loans, home loans, business loans and more. However, many people aren’t aware of what the term actually means, and as a result, aren’t well informed on how it can be financially beneficial.
Here, we discuss what exactly refinancing is when it comes to auto loans, and share information about how to do it correctly, as well as insight into why it can be a great financial move.
What is car refinancing?
Put simply, refinancing means taking out a new loan to pay off your old loan. While this act may initially seem counterproductive, it’s actually far from it.
When a new loan is taken out it will come with new terms, as well as a new interest rate. When refinancing is done correctly, these new charges can lower the overall cost of your loan.
For example, John may take out a $30,000 loan to pay for his new car with a set interest rate of 15%. Over the next few years, the total amount owing will have dropped, but John will still be left with a considerable amount of money to pay on the loan and be locked in with a 15% interest rate.
If John has $20,000 left to pay on his loan three years later, and finds a new financial provider that offers him a rate of 10% interest on the remaining $20,000 he has left to pay off, then shifting from the first lender to the new lender could save him money in the long run.
Why would I want to refinance my car loan?
The obvious benefit of refinancing a car loan is to lower the overall financial burden for the borrower. As mentioned above, if the borrower secures a new loan with lower interest rates and better fees and charges, then the overall amount they pay could equate to less than the total if they were to stick with their original lender.
However, there are some other benefits to refinancing a car loan:
Change the repayment amount
The majority of lenders will allow borrowers to raise their repayment amounts, however very few will let them lower the amount. When refinancing a loan you’ll be dealing with new terms, so it should be possible to choose a lower amount. Plus, the amount you’ll be borrowing will be less, as some of the loan will already be paid off, which should equate to lower repayments.
Borrow more money
Some people decide to refinance their car loan so that they can borrow extra money for other purposes. Some lenders will allow a cash-out refinance. This means that the new loan amount can be used to pay off the remaining amount owing on your vehicle, and there will be extra money on top of this.
You could add a co-signer
Adding a co-signer to a loan can help reduce interest rates. If a co-signer who has equity and a good credit score joins a loan, then there’s a high possibility that a lender will offer reduced interest rates. In most cases, a loan will need to be refinanced in order to add a co-signer.
How to refinance a car loan
If you’ve done your research and have decided that refinancing your car is a lucrative decision for you, then the process itself is relatively straight forward.
You should always do your research by comparing rates between different lenders and calculate how much the overall payment will be in comparison to your current loan. You should also check the terms on your current loan to see if there are any early exit fees.
Once you’ve found the right lender, they will be able to help you with the process. Lenders will require you to bring a number of documents in order to assess the loan, and these can vary between financial institutions, however, they generally include your current loan documents, pay stubs, identification and paperwork associated with the vehicle.
Will refinancing a car loan affect my credit score?
When you refinance a car, you are essentially taking out a new loan, so it may have a small impact on your credit score. However, the act of paying out your old loan will raise your credit score. Plus, as long as you keep up with your agreed payments your credit score will quickly return to normal, and may even rise higher.
Will I face any additional fees or charges when refinancing my car loan?
In some cases, yes. It’s very important to carefully read through your current loan contract to see if there are any fees for exiting your loan earlier. It’s also important to study the terms for the new loan and take into account their fees and charges when establishing whether refinancing your car is financially beneficial.