Car Loan Refinancing

Key points to remember before refinancing your auto loan

Before you decide to go ahead with refinancing your present auto loan, you can check the following factors associated with car refinancing:

1. Prepayment Charges: If you choose to refinance your loan, you will be required to prepay your existing loan. In most cases of prepayment, you will be asked to pay a penalty. This penalty can range from 1% to 3%, depending on your lender. Whether you want to refinance your loan for a more affordable interest rate or for better loan terms, you will have to assess the prepayment charges and see if they are lower than the benefits that you will gain from refinancing.
2. Depreciation in the Value of your Car: Assume you bought a new car with a car loan. By the time you think of refinancing this loan after a certain period, the value of your car would have come down slightly. Most lenders may not agree to refinance automobiles if they are very old. Even if they do agree, you may not be able to avail a very good loan deal.
3. Lender's Reliability: When you are thinking of refinancing your loan, ensure that you choose a trustworthy lender that offers dependable services. You should avoid finalising on a lender just because it offers a lower interest rate. You can evaluate a lender's reputation by enquiring among friends and family and by doing online research about the lender.
4. Additional Charges: When you go ahead with refinancing, you will have to apply for a new loan from a new bank. This will require you to pay processing fees and certain other charges. You will need to assess how much these charges are before you actually decide to refinance your auto loan.

When to keep away from refinancing?

It is a good idea to avoid car loan refinancing in the following circumstances:

1. When you have paid a Major Part of your Current loan: If you wait for very long to refinance your auto loan, you may not save much on interest. You would have already paid off a major portion of the interest of your loan at the beginning of the tenure.
2. When Refinancing Fees Exceed the Advantages: Before you refinance your car loan, assess the fees that you may have to pay for this procedure. In case you have to pay a high pre-payment penalty or a high processing fee, check if you can afford it. If paying such heavy charges does not make sense, it is better to not go for refinancing.
3. If you are Planning to Apply for New Credit: In case you have been planning to apply for a new credit card or a new loan, you may want to avoid refinancing your auto loan. This is because refinancing could affect your credit score negatively.

Car loan refinancing is a good idea if you get a better interest rate or if you get better loan terms due to an improvement in your credit score/financial condition during your current loan tenure.

Do keep in mind that you will not be able to refinance your existing loan within the same bank. Refinancing is typically done by applying for a new loan from a new lender. In case you do want to stick to your old lender, you will have to go for a top-up loan or pre-close your existing loan and apply for a different loan from the same bank.

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