Pros and Cons of Refinancing Car Loan: Everything You Should Know
If you want to manage your wealth, refinancing a car loan can be brilliant. It can help you reduce the amount of your monthly car payment or EMIs and thus, you can reduce your interest and loan tenure.
Refinancing a car loan means clearing your current auto loan with a new one that you obtain from a bank or finance company. However, it completely depends upon the bank or the organization’s discretion when and how it dispenses the amount of loan to the borrower.
Once you apply for a car loan, your current credit score and payment transactions will be scrutinized. If the bank feels you are genuine and have good creditability; it can play a key role in getting your monthly EMI reduced along with the rate of interest.
Refinancing a car loan becomes essential when your credit score has recently gone down. For example, if you couldn’t pay any of your EMIs on time for your previous auto loan, your credit score will be badly impacted. But if you paid all installments on time, and meanwhile your credit score has increased substantially, you can get your auto loan refinanced.
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What Does It Mean to Refinance a Car?
In simple terms, refinancing a car means borrowing money from a bank to repay your old loan. Thus, if you are applying for an auto loan for the first time, you are not eligible to apply for refinancing a vehicle.
For example, John took a car loan from a bank two years back. Now, he again applied for a loan from the same bank. If the bank gives him the loan, and John repaid his previous dues from this amount—it would be termed refinancing a car.
Pros of Refinancing Your Car Loan
- Low Rate of Interest
If your credit history has improved in recent times or since you purchased the vehicle, you can get your interest rate reduced. However, the lending institution will take a final call on it. For example, if you took a car loan and got it cleared within the stipulated time, your credit score will improve and your existing rate of interest will be reduced.
- Lower Your Monthly Payment
Refinancing can also help you get your monthly car payment reduced. When the amount of the loan is low, it’s easier to get your debts cleared. Also, if your income has dropped in recent times due to job loss or low earnings—when the monthly loan payment is low—you can confidently clear it.
- Get Your Previous Loan Paid Off
On the contrary, if your income has risen in recent times, you can consider refinancing your vehicle loan. This time, you can set a shorter loan payment option at a reduced rate of interest.
Cons of Refinancing Your Car Loan
However, it has its own set of pros and cons. Before you go to refinance your car loan, you need to evaluate its advantages or pros and disadvantages or cons.
Here is the list of cons associated with the refinancing of the vehicle. For your help, the cons of refinancing a car are given below:
- Incurring Refinancing Fees
Refinancing might seem easy, but when you wish to obtain it, you need to incur a lot of miscellaneous fees in the form of application fees, title transfer charges, and other fees.
However, these charges can vary. Different lenders charge different types of rates. Before you go ahead and opt for refinancing options, you need to read all the terms and conditions carefully. If these charges are equal to the same amount as your existing loan amount; you shouldn’t opt for it.
For example: If your current loan amount= €10,000
Rate of Interest= 20%
For total interest, you have to pay= €3379 after 3 years.
Now, suppose you go for the refinancing option!
Principal amount= €10,000
Rate of Interest= 15%
Time= 5 years
Now, the total interest you have to pay= €4,274 after 5 years. And, thus you may end up paying €895 more.
- You May End Up Paying More Interest
When you refinance a loan amount spread over a larger period, you may eventually end up paying more because of the additional payment you pay in the form of interest.
- Paying Additional Fees
You have to consult your lender to know if prepayment would attract a penalty or not. You may also have to pay additional charges for transferring the title. If there are any application fees or documentation charges involved, you must pay the same.
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How to Evaluate If Refinancing Your Car Is a Good Idea For You?
If you are looking for possible ways to reduce your monthly payment and clear your debts at the earliest, opt for refinancing your car.
You need to consult various money lenders or refinance institutions to find the actual interest rate and terms for the same. You should use an auto loan refinance calculator online to find your current auto loan with refinance loan options. Then you can compare and see how the same can affect your monthly payment and interest.
You should always analyze the pros and cons of refinancing your vehicle before you select the refinancing option. You need to understand the overall cost you are incurring for it.
Best Tips for Refinancing an Auto Loan
If you want to refinance your auto loan, it’s better to do some online research before you come up with a solution. For your help, we’ll discuss some useful tips to refinance an auto loan.
1. Compare Interest Rates
Before you apply for a car loan, it’s better to compare various interest rates at lending institutes and see what suits your needs.
In most cases, lending institutions will give you an estimate to help you know the amount of monthly payment you have to pay for refinancing the vehicle. Meanwhile, if you have any queries, get your doubts resolved at the earliest.
2. How Will It Impact Your Credit Score?
When you apply for refinancing and open a new loan account, your credit score will be lowered. However, if your payment history is alright and you made a timely payment; your credit score will increase. However, it won’t help if you are taking an auto loan for the first time.
3. Analyze Your Current Loan
Most borrowers have a minimum loan amount that they have to pay for refinances. You should know the payoff amount in advance whether you can qualify for it or not.
You should know the amount of interest that you would be paying along with the monthly amount and the total cost of opting for the refinancing scheme.
4. Scrutinize Your Credit Score
You must check your credit score before you apply for refinancing. You must pay down your debt and maintain a good payment history before you opt for a refinancing option. You should check your credit score before you apply for it.
5. Furnish Necessary Documents
Your refinancing for a vehicle application will be approved immediately if you have the following documents:
- Income proof
- Residency proof
- Insurance proof
- Loan history documents
- Vehicle details and essential papers
6. Know the Right Time for Refinance
You should know the right time to refinance a car loan. If your credit loan has improved, you can go for the refinancing option. But don’t opt for it if your credit history is not appropriate.
Also, the right time to refinance your car loan could be when you are getting married or want to have a baby or incur a heavy expenditure towards your children’s education.
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Quick Tips to Refinance With Bad Credit History
- Show your income proof that it can support EMI.
- Make the initial downpayment even if the lender doesn’t ask for it.
- Your credit report might have some errors, make sure to get them corrected before showing it to your next lender from where you wish to get refinance option.
- Instead of banks, you should also reach out to housing finance companies and NBFCs.
There are several reasons why you should refinance a car loan, but if your existing car loan account (current account) shows an outstanding balance, you need not refinance. You can instead try to clear your debts at the earliest.
If you take more time to pay off the loan, you have to pay more interest. So, use an auto calculator and get your auto loan cleared at the soonest.
FAQs (Frequently Asked Questions)
1. Will Refinancing Impact My Credit Score?
Refinancing may sound, but it can significantly hurt your credit score. If you delay making payments for even one or two installments, your credit score will get reduced and can affect your future loan-taking capacity.
2. Does Refinancing a Car Mean Starting Over?
Nope. Absolutely not. It is not equal to starting over. Through refinancing, you can save a lot of bucks. Depending upon personal preference, you can pick a loan that suits your financial needs and overall aim.
3. Can You Refinance With Bad Credit?
It’s absolutely false that you can’t go for a refinance option with a bad credit score. Suppose you have bad credit but want to get avail yourself of refinancing options, you need to win the trust of the lenders and convince them accordingly.