If you have stumbled across the words ‘car loan refinancing’, chances are that you have availed a car loan to fund your dream of owning a car. After availing a car loan, you may realise that you are paying a higher interest rate because you find out that another lender is offering lower interest rates. It is also likely that you wish to extend the repayment tenure on your existing car loan or you simply wish to add or remove a co-applicant from your existing car loan.
Whatever your reason is, we are here to tell you what refinancing a car loan means and what happens when you avail a refinance on your car loan.
What does refinancing a car loan mean?
In simple terms, when you avail a new car loan in order to pay off your existing car loan, you will be refinancing your car loan. Your car will act as collateral for the new refinanced loan. Car loan refinancing is usually done by individuals who have availed a car loan before at a higher interest rate and later found a lender who is offering a lower interest rate. Those who face a financial crisis due to a sudden drop in their income and do not want to be burdened by the high EMI (equated monthly instalments) payments also can find refuge in car loan refinancing.
What happens when you avail refinance on a car loan?
Availing refinance on a car loan could lead to the following outcomes:
Lowered interest rates – This is perhaps, one of the most common reasons as to why people seek to refinance their car loans. When someone who has availed a car loan from a particular lender finds another lender offering a lower interest rate, they tend to get carried away by the offer. After all, who doesn’t want to enjoy lower interest rates? Lower interest rates also mean a reduction in the total interest charges paid over the loan tenure.
Reduced EMI payments – Lower loan interest rates lead to the reduction in the monthly EMI payments which is possible through car loan refinancing. Reduced EMI payments are ideal for individuals facing a financial crisis due to a sudden drop in income, medical emergencies, etc. Most of us can agree that the monthly loan payments can impact a household’s monthly finances to a large extent. Hence, a reduced EMI payment can aid in lifting the finances of a household.
Changes in repayment tenures – Car loan refinancing allows individuals to shorten or extend the repayment tenures on their existing car loan. People whose financial condition has improved over time may want to clear off the liabilities of their car loan by opting for a shorter repayment tenure which is accompanied by higher EMIs. Similarly, people who wish to pay lower EMIs can do so by extending the repayment tenure on their car loan.
Addition or removal of co-applicants – Refinancing a car loan will let you add or remove a co-applicant from your existing car loan. This is possible because in case of car loan refinancing, a new contract is made between the borrower and the new lender. Adding someone to a car loan as a co-applicant is usually done when someone has a low credit score, or he/she does not meet the minimum income criteria. On the other hand, removal of a co-applicant is usually done when the income of a person has improved over time and the borrower does not feel the need of a co-applicant.
Should you refinance your car loan?
Whether or not you should refinance your car loan will depend on your financial state. If you are struggling to keep up with the monthly payments of your car loan, refinancing may be a good idea. Refinancing will surely aid in reducing your monthly expenses which will leave you with some cash to spare on other commitments. Many people also opt for refinancing if they feel that they have not got a great deal on the interest rates the first time around and the new lender is offering better interest rates.
Before you decide to refinance your car loan, remember to check with your existing lender if there are any penalty charges on foreclosure or prepayment. If there are, refinancing may not prove useful to you since the idea is to reduce the overall charges on the existing car loan. Refinancing is also not a good option if you do not wish to extend the repayment tenure or if you have paid off a substantial amount on your existing car loan.
The bottom line
If done wisely, car loan refinancing can come in real handy when you are burdened with high EMI payments and when you feel you are paying much more than what you should be paying. Don’t forget to shop around for lenders before you zero in on one lender to refinance your car loan. Once you find the right lender, you can get ready to enjoy the peace of mind offered by the reduced financial burden.