When and why to refinance your car loan

If you have opened this blog link, it means you are thinking about refinancing your car loan. However, you can’t decide whether or not it is the right move. Well, don’t worry, as we are here to help you. Here we’ll be discussing points like - What is car loan refinancing? Why should you refinance your car loan? When to/not to refinance a car loan?

That is not it. At Carmudi, we are here to help you with every aspect of car loan refinancing. That’s why we have curated a complete step-by-step car loan refinancing guide and a list of mistakes to avoid while refinancing your car loan. So, if you are serious about refinancing your car loan in the Philippines, go through all the material and make your next financial move just right. Starting with the basics,

What is car loan refinancing?

Refinancing a car loan allows you to get a new loan with different terms (reduced interest rate, adjusted loan term). It is a strategic move by a lender to lower his monthly payments.

It's time to answer the next big dilemma,

Why should you refinance your car loan?

When an individual opts for car loan refinancing, his/her financial well-being improves via lower monthly payments, quick loan pay-off, and low interest. But, as one shoe doesn’t fit all sizes, refinancing is not for everyone. In the wrong situation, it can make matters worse, leading to paying more interest, bigger monthly payments, owning more than the car’s worth, and the burden of extra fees/insurance costs.

You must be wondering, what are these wrong situations that can lead to so many problems? This brings us to our next heading -

When should you not refinance a car loan?

It is very important to know when not to refinance a vehicle loan, as the wrong timing could cost you more money over the life of the loan and can even damage your credit score. Below are a few situations in which you should avoid refinancing.

Prepayment penalties on your current loan

Often financial institutions apply prepayment penalties on the loan; it is an instrument that allows them to make up interest they’ll lose if the borrower pays off the loan before the term expires. These penalties can cost you the same or more than you’d save from refinancing. So, what’s the point of opting for refinancing?

Purchased the car recently (within the last 6 months)

When you get a new car (and a loan), your credit score takes a downward leap meaning you won’t get as favourable rates as you would earlier. Therefore, it is advisable to wait for at least six months before refinancing your car loan. Until then your score will most likely recover.

You went underwater on your car loan

Going underwater or upside-down on a car loan means the car owner owes more than the vehicle’s worth. In such situations, borrowers are charged with a very high interest rate for refinancing.

Taken a new loan recently

Another scenario that makes loan refinancing a big no is when a borrower has taken any other loan recently. It can be a personal loan, a home mortgage, or a new credit card. The reason is the same when you avoid refinancing for at least six months after getting a new car i.e., your credit score will dip which will bring in unfavourable rates.

After learning when not to refinance, it is time to look at the favourable points, i.e.,

When should you refinance a car loan?

Let us discuss when it’s best to refinance a car loan and enjoy all the benefits, i.e., to save money on the overall cost of the car loan. Below we have mentioned several situations when it makes sense to refinance a car loan.

 

Interest rates have dropped

Government regulations and market situations bring fluctuations to the interest rates. Those interested in refinancing should pay attention to the trend in the rates. Also, depending on the timeline of the existing loan, the refinancing rate may be lower at a later date. If that’s the case, you’ll end up saving money by refinancing your loan.

 

Improved credit score

One of the major factors determining interest rates is your credit score. In cases where the borrower makes on-time payments on the car loan and has paid off a significant amount of other debt, the credit score may increase. When your credit score becomes higher than when you took the car loan, there are chances you may find a better deal via refinancing.

Positive equity on the car

When a borrower has positive equity in the car, there are chances to get better auto loan refinancing options. As it becomes much safer for the auto lender, thus resulting in a better interest rate for the borrower.

Bad experience with the current lender

Saving money might be the major reason to switch lenders but it is surely not the only one. Many times a bad experience with the current lender uses a borrower towards refinancing. This will not only help the borrower get a better lender but also help save money.

Want to cut down on monthly payments

If you are someone looking for ways to cut down on your monthly payments then refinancing is a good option. While it may cost you more overall, you'll get a longer-term loan which will make your monthly payments manageable.

Bottom line

When deciding whether to refinance your auto loan or not, there are many factors a borrower needs to take into account. Refinancing might be a good option if you get a higher interest rate and there are no prepayment penalties on your existing loan. This also applies if you need to reduce your monthly expenses.

However, you might want to wait if refinancing is negatively impacting your credit score or if it is costing you more money in the long run.

If everything works out and you are all set to refinance your auto loan then the next step would be to look around for the best refinancing rates and lenders. Often lenders provide free quotes, so go ahead and compare the rates and make a wise decision.

 

Also Read: How to calculate your used car loan payments: Tools and tips