Auto Refinancing : Is it Worth It to Refinance your Car?

• 6 March 2020 | 1176 Views | By Mint2Save

While taking a car, you might not have all the money required to buy and thus opt for a loan. These are called auto loans. The market of auto loans lacks transparency and has been escaping the regulatory attention recently and thus consumers have to face a host of systemic abuses in the auto finance market.

Two of them are Markup of interest rate by car dealer and spot delivery. Markup of interest rate by car dealer includes the changing of interest rates by the dealers by their own discretion other than banks and keeping the total or some of the difference for themselves. 

The scam in spot delivery happens like this: When the financing is not finalized before the customer has taken the vehicle, the dealer tells the consumer that the financing they initially thought that would finalize has “fell through” and they need to come back and sign a new loan with less favourable terms. 

The dealers also add add-on products like extended warranties or other insurance products and woo the customers to take them. Often in many cases, they lack value or are overpriced. Sometimes, the consumers will be told that add-on products are required by the lender even when that is not the case.

When Does Refinancing a Car Loan Make Sense?

Due to the above-mentioned problems and generally less awareness among people on how they work, many people get auto loans with generally bad terms. For those people who has their interests differently aligned with that of their loan, auto loan refinancing is a great option.

Auto Refinancing:

Is it a good idea to refinance a car?

Auto Refinancing loans are those which are secured to clear the loan that is already taken for obtaining a car. In effect, you replace your current car loan with a new one. Here, the car itself will be kept as collateral. So, you might ask why should that be good? The reason that it is good is that this new loan has a fixed interest rate, fixed monthly payments for a period of time which can be adjusted based on convenience. You also have a chance to alter the co-applicants for the loans.

This process of refinancing the loan can have different outcomes for car owners. All of them can save money or make the repayment more convenient. 

Benefits of Auto Refinancing

The main benefits of taking refinanced loans are:

• Lowered Monthly Payments

This is the reason for which most of the people go for auto refinancing. There are two possible ways for this: Decreasing your interest rate or increasing your loan term. There are certain times where you can do both of them thus giving you the highest value. In general, the best way to dramatically lower your monthly loan payment is to increase the period for which you repay the loan. But the drawback here is that you will end up paying more for your car in total than without refinancing. If you are prepared for that, this is the best!

• Decreased Interest Rate

As we have said before, decreasing the interest rate is interrelated with that of lowering the monthly payments. But, there are some people who prioritize lowering the interest rates than 

Decreasing monthly payments. Refinanced loans usually have low-interest rates compared to the loans directly given for purchasing cars, so assuming you will get the new loan with the same or briefly extended tenure, you will end up paying less interest rate than the original loan.

How Does Auto Refinancing Work?

Let us now consider an example which will let you understand better how refinancing can be beneficial.

Consider that you take a loan of 20,000 to get a car and agreed to repay the amount in the duration of 4 years at the interest rate of 5%. That would leave you paying $460.59 per month. Let us think that you have already paid the monthly payments for 6 months and thus paid about $2764 leaving you to pay $17236. In general, if you would continue paying like this, the interest you will pay would be $2106.

Let us say that now at this point, you have heard about refinancing and take the remaining amount as a loan with an interest rate of 2.5% and over the tenure of 4.5 yrs (which would in total render it five since you have taken the loan). Your new monthly payment would be $391.98 and the total interest you will be paying is $1166. Which means you have saved about $942. Let us say you wanted the same 4 yr loan period, that would make the new monthly repayment amount to be $429 and the interest paid to be $783 thus saving you $1323. As you can see, increasing the loan repayment period will decrease the amount of monthly payment, but increase the amount of interest.

Considerations for Auto Refinancing

Before you go for applying to get refinanced loans, it is also important to discuss when it is better not to for refinancing because under certain circumstances refinancing only increases complexity and trouble than solving it. Those circumstances are:

• Planning to apply for new credit: 

When you are planning to apply for a new credit card or loan, you need to see that your credit score is as high as possible. With refinancing the loan, your credit score might decrease making it harder for getting a better credit card or loan.

• When the refinancing fees are higher:

Obviously people opt for refinancing only if they are advantageous over the current scheme. Sometimes, refinancing fees would be so high because of huge prepayment penalty or a high processing fee so that you cannot afford them which makes refinancing not a better alternative.

• When it has been so long after taking the car loan:

If you have been repaying the car loan for a long time, you might have already paid off a large portion of interest and thus might not be able to save much on it due to refinancing which decreases the incentive to obtain it.

While generally there are no specific and particular criteria for eligibility for refinanced loan other than the general ones, below are some of the factors that the loan lenders generally see to deciding to approve or not:

• Whether you are defaulting on the existing loan or not

No Bank will want to give you a loan if you are defaulting on your existing payments. So, if you are currently behind your EMI payment, the chances that you will get refinanced loan with better terms are slim.

• Worth of the car

As said previously, in refinanced loans, the car itself will be taken as collateral. So, the lenders will certainly consider the worth of the car in deciding to give you loans. The lenders will inspect the condition of your car considering the age, mileage etc and decide the initial terms for further negotiation.

• Credit Score

Credit score can be said of representing your financial health. More the credit score, better the chance of getting loans with better terms.

Does Refinancing a Car hurt your credit?

If your credit history has been good in the past and you are regular in meeting with obligations of auto refinancing, there is hardly any chance of your credit score getting hurt / downgraded.

Applying for the loan

What happens when you refinance a car?

Now that you have analyzed all the information and decided on getting a loan, The first step in applying the refinanced loan is to decide which bank to get the loan from. The analysis done in the previous steps will help you to identify the lender with good terms. Generally, you will get refinanced loans from a new lender and cannot apply for refinancing with the same bank that you already have a car loan. 

In cases where you certainly want the new loan to be taken with the same bank make sure you have a high credit score than before so that you will be eligible for a loan with better terms and you might be needing to take a top-up loan or pre close the existing loan.

After deciding what bank to take the loan from, the next step is to gather all the required documents. You must be ready to give the following information during application: Personal and contact, Employment and income and the auto. Then, approach the bank with the request of refinancing the loans and try to negotiate the best rate of interest along with other terms

Conclusion

With Auto financing being plagued by many scams and lack of transparency and also lack of awareness among the general public, many people end up having to pay the auto loans that have high-interest rates or many other less favourable terms. Auto refinancing is an option for those people to dislike their current loans and want to change it. In effect, refinancing is a new loan that is taken to clear the existing car loans. This new loan will have more favourable terms than the previous ones including fewer interest rates, high tenure etc.

Is refinancing is a bad idea?

But if you have paid your current loan for a long time or if the refinancing fee is higher, getting a refinanced loan might not be so useful. Also, be aware that some banks can also reject giving loan if they have defaulted the payments or have a low credit score or their car might not be that worthy of giving a refinanced loan.