If you have taken a loan to buy your car and are having problems repaying the loan, you can take yet another loan to help you pay off the original loan. This is known as refinancing. It helps you to reduce your financial burden. There is another reason why you may want to refinance a car loan, which is you may be able to get the loan at a lower interest. This can lead to a lesser monthly payment, thus helping you save on money.
There are many reasons why you may want to refinance a car loan. Let us take a look at the reasons.
- Reduced interest rate: When you bought your car some time back, you may have taken a loan at an interest rate of 10%. Now you may find a lender who is offering a loan at 9%. This represents a saving of 1%, which can be substantial savings for you. However, you must remember that when you refinance a loan and pay back the original lender, you are prepaying the loan. Lenders generally levy a fee or penalty for prepayment. You need to work out the cost of prepayment. If it works out to be more than the savings from the reduced interest rate, then it does not make sense.
- Modifying terms: When a loan is taken, there would be various terms and conditions associated with the loan, including the tenure or duration, charges, insurance, and hypothecation. If you get a loan, which gives you better terms and conditions, then it naturally makes sense to go for the new loan.
- Monthly savings: With a lower interest rate, you get to save money every month. Even a 1% reduction in interest rate will lead to some money being reduced from your monthly payouts. This represents savings, money that you can use for something else.
- Changing a co-signer: If you want to add a co-signer to guarantee your loan or remove an existing co-signer who for some reasons does not want his name to remain, you can then go for refinancing. When you sign a new agreement for the refinanced loan, you can include a new co-signer to relieve the previous co-signer of his obligations.
- Changing lender: You can opt for refinancing if you want to change the lender. For any reason, if you are not happy with the old lender or just want to sign up with a new lender with whom you are now doing business; refinancing helps you to do it. Refinancing by default implies a change in the lender.
Things to keep in mind
When you decide to go for refinancing, there are certain cons or negatives related to this. Your loan term or duration may increase. With a lower interest rate, you have to pay for a longer period, which in the long run means you will be spending more money. Your monthly payout will come down, but the overall amount will definitely increase.
How to do it
Apply to a new lender who gives you a good deal. Make sure you have all the documents of your present loan ready. Also, make sure you have a good credit score, if you have defaulted, then you are unlikely to get refinancing. Evaluate the terms of the refinancing and make sure you read the fine print. Check the prepayment penalty and once you are convinced you will get some benefit, go ahead and complete the formalities.
Refinancing a car loan has many advantages, you need to evaluate the new terms before you sign up, so you can reap its benefits.