Refinancing a car loan is a big decision for anyone. There could be a number of factors behind this decision, and there are no restrictions on when you can refinance your car loan. Some car owners consider refinancing their car loans to save on steep monthly charges. However, it is important to weigh the benefits and disadvantages of a car loan refinance before you make a definitive call, as we will discuss throughout this article.
What Is Car Loan Refinancing?
By definition, car loan refinancing refers to the act of paying out your existing loan with another one. Of course, the new financing agreement has to be correctly gauged for it to make any financial sense in the long term, or the entire exercise of refinancing your car comes to nought. Car financing agreements come in multiple shapes and sizes. Prominent among them are Hire Purchase or HP and Personal Contract Purchase (PCP). In general, these contracts can run for roughly three years. If customers opt to refinance their car while nearing the end of their PCP contract, they will have to keep paying interest.
Why Car Loan Refinancing Makes Sense
Most people don’t look closely into their financing agreements and end up disappointed when they realize the amount of interest they’ve paid over a period of time. They desperately need a way out of this contract, and this is where refinancing comes into the equation. But it’s not as simple as picking another lender to finance your car.
It’s important to remember that although the new lender may promise lower monthly payments, it could be for a longer duration. This means you may end up paying more interest than you did previously.
Ideally, you would want to opt for a shorter-term refinancing agreement so that you’re not spending too much money in the form of interest. But this could mean paying more each month than you used to. If your budgetary needs require you to seek lower monthly payments, it’s certainly worth considering as you would get enough breathing room each month.
When Should You Refinance Your Car Loan?
On top of factors like overburdening monthly payments, there are a few scenarios when it could be ideally suited to refinance your existing car loan.
Lower DTI Ratio
DTI or debt-to-income ratio is the amount that’s left over when you divide monthly earnings/income by the monthly loan repayments. If this calculation fetches you a positive amount, you have a low DTI ratio. This translates to better interest rates and duration for the refinancing. Since your earnings surpass the amount of debt, lenders feel more comfortable with lower interest rates.
Improved Credit Rating
Similar to the DTI we discussed above, your credit rating determines the kind of loans and interest rate you will get. In the early days of your car purchase, you may notice a marginally reduced credit rating. This happens when your existing lender performs a hard inquiry on your personal credit during the initial loan application process. However, it only takes a few months for the credit rating to rebound to its original state.
Moreover, customers who make timely payments of their dues tend to improve their credit significantly. This is important to remember if you want another loan or refinancing in the future.
How Can I Get Rid of My Current Car Loan?
When you pick a new lender to refinance your car loan, the company will take care of all the technical details on your behalf. However, it is advisable to confirm with the new lender about the fees they will charge for carrying over the loan for you. Take a closer look at the fees (if any) and compare them with what you would save with the new lender. If the long-term interest outweighs the existing loan payments, it’s probably better to pick another lender.
Can I Refinance My Car Loan Through My Current Lender?
While car loan refinancing is usually done with another lender, this doesn’t always have to be the case. Customers can contact their car loan broker for more information or even directly approach the lender. In most cases, your broker may help you find a good deal with the existing lender, thus saving you the trouble of switching providers. While this isn’t the ideal scenario for everyone, it’s certainly worth considering for users who are happy with their current lender.
The Bottom Line
Each individual has unique reasons for refinancing car loans. The practise isn’t discouraged by any measure, though it may not be feasible for customers with lower credit. In almost every case, a lower credit rating translates to higher interest rates, which can amount to quite a lot in the long run. If you want to refinance your car loan, make sure all the payments are on time so that it reflects positively on your report. Although customers can refinance their cars at any time, it is important to do it at the right time to make it worthwhile.