Should You Go For Car Loan Refinancing?

 

A car loan refinancing is the process of replacing your current auto loan with a new one from a different lender. Doing so can help you in several ways. It can give you better repayment terms like better rates and loan tenure. You get better benefits, features and terms with a car loan refinancing.

Why should you go for car loan refinancing?

There are several benefits of getting this facility.

It lowers your interest rate: If you do find a suitable refinancing loan with a lower interest rate than what your current loan is giving you, then go for it. With a lower interest, you save more money over time. And, as they say, more money saved is more money earned. All you need to do is to pay off the loan you have at hand and then talk to the new lender. Remember though that prepayment charges for the old loan is lower than the refinancing’s benefit. You may also want to think about refinancing your car loan in case your credit score has improved since the last time you took a loan. If so, you can be eligible for a loan with better interest rates.

It modifies your loan tenure: When you get an auto loan refinancing, you can modify the tenure. This helps you in bringing down your monthly EMI payments. For instance, if you increase the tenure, you can pay over a longer time safely and this brings down what you pay each month. However, this means you’ll be paying more money in the long term. You can reduce your loan tenure. However, here the EMIs shall be higher even though you will be able to pay off the loan faster.

To change the agreement of a co-signer: On refinancing a loan, you can add or remove a co-signer. If your current co-signer does not want to give the lender a loan guarantee, you can remove their financial responsibility.

To change the auto loan terms: If you weren’t happy with the terms of your loan last time, you can use a car loan refinancing to change the terms now. If you get a better auto loan, you can choose to refinance the loan to get all the features.

Things you need to remember before taking a loan refinancing

There are a few things to know about before taking the step of getting a loan refinancing.

Prepayment charges: To get a loan refinancing, you’ll need to prepay the current loan, and in most cases that involves a prepayment penalty. This can range between 1% to 3% of the loan.

Your car’s depreciating value: In case you buy a new car, and think of refinancing the car loan. The value of your car slightly comes down and new lenders may not want to refinance cars and automobiles that are too old. Even if you do get a deal, it may not be a good one.

Reliability of the lender: Getting a trustworthy lender is very important. Don’t go for a refinancing just because of lower interest rates.

Additional fees and charges: If you choose to go for a refinancing, you’ll have to apply for a new loan from another bank. This involves giving some processing fees and additional charges. You’ll need to determine how much these shall be and if these are ok with you, or not.

Refinancing - How Does Refinancing Affect Your Credit Score?

 Refinancing can be a viable option for you in such a case. Refinancing allows you to make the debt easier to repay and improve the terms of your loan. It can reduce your interest rates and lower monthly payments as well.

What is Refinancing?

Refinancing is a process that conveniently allows you to replace an existing loan with a new one. This new loan would have better terms and should help you improve your finances. You can pay off your current debt with the new loan. Let me elaborate on the steps of refinancing to give you a better picture:

   You have an existing loan that you wish to improve

   Find a lender offering better loan terms

   Apply for the new loan

   Pay off the existing debt using the new loan

   Make payments on the new loan till it is settled

   Save money on the interest paid

Most loans, such as home loans, auto loans, student loans, and personal loans, have refinancing options.

Refinancing: Its Effects on Your Credit Score

Can refinancing affect your credit score? Maybe. Maybe not. Read on to know more.

Balance Inquiry

When you apply for a new line of credit, including a refinance loan, lenders will run a check on your credit report, which results in a hard inquiry. Hard inquiries reduce your credit score by a few points. The influence of a hard inquiry on your credit score decreases over time.

You can regularly monitor your credit report to gauge the impact of hard inquiries on your credit score. Use mymoneykarma’s Intelligent Finance Tool of to keep track of your credit report.

Account Closure

As you refinance a loan, your initial loan account will be closed, as you will be starting over with a new loan. This loan has a new opening date and no payment history. Some credit bureaus will consider your closed loan while calculating your average credit age, whereas some bureaus won't.

Similarly, some credit bureaus might even consider your payment history of the closed loan while making your credit report. However, it will receive much lesser importance than an active account. If you are planning on closing very old accounts, refinancing could be a sudden blow to your credit score.

Credit Mix

In case you are planning on refinancing to settle multiple lines of credit, you may want to stop and reconsider. The moment you choose to refinance an open line of credit, the older account is scraped and a fresh line of credit is initiated. Not only will this reduce your average credit age, but it will also mar the diversity of credit accounts that you maintained earlier.

The variety in the types of accounts you have can help you secure a better credit score. Refinancing might not be a great idea with respect to this aspect.