Car Loan Refinancing

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    What is car loan refinancing?

    A car loan is often one of the most expensive bills that you pay, usually right behind your mortgage or rent. If you’ve found yourself unhappy with how much you pay towards your car loan each month, don’t despair. Car loan refinancing is a popular and effective way to access better loans than what you started with.

    When someone talks about refinancing a car loan, they are describing the process of getting a better deal on the terms and conditions of the loan. You can refinance with your existing lender by negotiating better terms, or you can refinance by going to an all-new lender and switching your loan over to them.

    Most car loan refinancing options are done through a new lender. Under this arrangement, the new lender pays off your old loan in its entirety, and you then begin making payments to the new lender. Ideally, your new lender will grant you better interest rates and other loan features that fit your needs.

    What to consider before refinancing your car loan

    Before starting the process, there are a few important factors that you should take into account.

    • Credit score

      Every new loan application goes on your credit file and could potentially harm your overall credit score. Refinancing a loan too frequently can thus hurt your credit and actually make it harder to get good interest rates.

    • Car value

      The value of a vehicle generally decreases over time. If your outstanding loan amount exceeds the car’s current value, you are considered a high-risk borrower, since the lender lacks sufficient collateral to cover the loan.

    • Loan term

      If you only have a short while remaining on your loan, the costs of refinancing might exceed any marginal savings from the new loan. If you have a long time left in the loan, refinancing can have a more substantial impact.

    • Switchover costs

      Refinancing a loan can carry fees from both the old lender (e.g early break fees, exit fees) and the new lender (e.g application fees, valuation fees). Make sure these costs don’t erase your prospective savings.

    Benefits of refinancing your car loan

    Car loan refinancing brings numerous advantages, particularly for those who are early into their loan term, or if the financial market has changed significantly since they first got the loan. These advantages include:

    • Savings: If the new loan has better interest rates and fewer fees, your payments should become cheaper, especially if the old loan had high interest rates.
    • Loan term: Lengthening or shortening the loan term affects the payments each month, the interest that accrues, and your total amount you’ll repay.
    • Lender switch: If your current lender is difficult to work with and isn’t meeting your financial needs, you may find that you work better with a different lender.
    • Custom options: A refinanced loan can have features like extra repayments, redraw facilities, or alternate repayment schedules, which can be very useful.
    • Balloon payment: One way to reduce monthly payments is to have a balloon payment, which is a large repayment at the very end of the loan term.
    • Debt consolidation: Refinancing can allow you to wrap other existing high-interest loans into one new line of credit, which grants you more control.
    • Co-borrower update: If your original loan included a co-borrower with low credit, then applying without them may improve your approval chances and your rates.

    Drawbacks of refinancing your car loan

    Before jumping into the refinancing process, it is wise to learn about the potential risks. There are some instances when refinancing may not be the right option, or may not be worth it. Some disadvantages include:

    • Interest payments: If your new loan term is longer than the original, you might end up paying more in interest overall, even if each monthly payment is lower.
    • Entry and exit fees: When you close out one loan and open another, you may see fees from both the original lender and the new lender, which can add up
    • Risks of applying: If your financial position is more risky, you might end up getting rejected on your refinancing application, which costs you time and money.
    • Older car rates: Since older cars are seen as more risky to back, new lenders might offer you higher interest rates than what you already have locked in.

    Step-by-step guide to car loan refinancing

    With so much information out there about refinancing car loans, it’s hard to know where to begin. Here is a general roadmap of how to actually go about the process:

    1. Contact your current lender

      Verify your outstanding loan balance, exact interest rates, and monthly payments. Ask about their policy on loan exit fees.

    2. Check your credit score

      Look at your most recent credit score and get a free detailed credit report if you can. A higher score can qualify you for better rates.

    3. Shop around for new loans

      Check out the car loan market to see what kinds of options are available and how they compare to your existing loan.

    4. Determine establishment fees

      After you’ve found some promising loan offers, dig into the fine print and find the exact cost of setting up a new loan.

    5. Calculate cost of refinancing

      Learn how much the new loan saves you, and compare that to the sum of your old loan break fees and new loan setup fees.

    6. Apply for a new car loan

      If you can see that the savings from a new loan will outweigh the costs of the transition, you can submit a new loan application.

    Car loan refinancing with bad credit

    Having bad credit will make refinancing your car loan challenging, but that doesn’t make it futile. A strong repayment history on your existing loan will make you a more appealing candidate to a new lender. You can use the old loan as a springboard into a new loan that has better terms.

    However, if you’ve been struggling to keep up with the old loans and have missed some payments, you may want to adjust your budget and get your current payments under control before attempting to refinance.

    Car loan refinancing FAQ

    When can I refinance my loan?
    Usually, you should wait at least 6 to 12 months from your original loan before applying for a new one. Too many loan applications in a short time frame can hurt your credit and impact your potential savings.
    What documents do I need to refinance a car loan?
    The car loan refinancing process closely overlaps with the regular car loan application process. You will need your driver’s licence, proof of employment and income, recent bank statements to show expenses, and vehicle registration and valuation statements, among other documents.
    Does refinancing hurt your credit?
    Submitting new loan applications and opening a new line of credit might dent your credit score in the short term. However, if the new loan is more manageable and empowers you to make timely and consistent repayments, it will ultimately help you build up your credit in the long run.
    What is a balloon payment?
    This is an optional feature that some loans have, in which you make smaller monthly repayment and then one large final payment at the end of the loan. Balloon payments are often between 10% and 50% of the total loan amount.

    Key things to remember for refinancing your car loan

    Getting your car loan refinanced can be a fantastic opportunity to strengthen your budget and build a solid credit history while saving money on car expenses. Before you dive into the process, it’s important to do your preliminary research and understand the benefits and drawbacks that refinancing would have for your financial situation. At a minimum, it never hurts to research the state of the market and take a peek at what’s available.