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Car Loan Refinancing
Want to get a better deal on your car loan? Consider refinancing.
Did you know you may be able to refinance your car loan and take advantage of a lower interest rate? The guide below will take you through the ins and outs of refinancing and show you some options to compare.
Why might I refinance my car loan?
If you’re still on the fence about refinancing your car loan, here are a few benefits to consider:
- You could reduce your repayments. Better interest rates may be available and refinancing can help you reduce the total interest over your loan term.
- You could make your balloon payment more manageable. If you are currently paying off a balloon scheme loan, you will have to cover a lump sum when your loan ends. Refinancing can allow you to pay off your balloon payment over an extended period if you aren’t able to pay the lump sum.
- You could sign up with a better lender. Not all lenders are created equal. Some offer discounts on other products when you sign up for a car loan, better customer service, easier account management and add-ons that may not have been available with your previous lender.
How does refinancing a car loan work?
Refinancing your car loan means simply switching to a different lender that may be able to offer you lower rates, fewer fees or easier repayment options to help you pay off your loan sooner. If done correctly, refinancing your car loan can potentially save you money.
To ensure that you get the best refinancing option, it’s important to compare all available car loan refinancing options – and understanding the full fees and charges of moving to a new deal – before making the decision to switch.
What should I look for in a refinancing car loan?
- Lower repayments. This is very important to check. Less interest does not always mean lower repayments, so remember to take into account all the necessary fees as well as the loan term you’re asking for and use a comparison rate calculator to determine the cheaper option.
- You won’t pay more interest over the loan term. Lower repayments may just mean you’re paying more interest over the loan term, usually because the term has been extended to lower your interest.
- The loan has the features that you want. If you want to be able to make extra repayments, repay the loan early, or an insurance product bundle, make sure the new lender offers this.
- The lender is legitimate. A number of lenders operate in the car finance space and it’s up to you to sign up with a reputable compare. See how transparent the lender is with rates and fees and how easy they are to contact.
How to compare car loans when you want to refinance
If you believe that refinancing your car loan could be a good option, there are some features you must compare when selecting what car loan is right for you:
- Interest rate. Ensure you compare the interest rate across all the car finance options available to you. The lower the interest rate the better, so try and find a loan that gives you the lowest interest rate to assist you in saving money.
- Additional fees. Most refinancing loans will have fees that you may be liable to pay. Understand all the fees you may have to pay and look for a refinancing option with the lowest fees to help you save money over the duration of the loan term.
- Maximum loan amount. Each refinancing option will also have different maximum loan amounts that you can borrow. If you have a certain figure in mind that you need to borrow, look for a loan that will allow you to borrow this amount.
Benefits and drawbacks of refinancing
- Lower interest rate. When you refinance your car loan, one of the most important advantages is typically a lower interest rate. As with any loan, interest is usually what accounts for the highest costs. Keep an eye out for a car loan with a lower interest rate than what you are currently paying. Interest rates tend to fluctuate, so it’s all about selecting the right time to refinance to get the lowest interest rate.
- Lower repayments in the immediate future. If you extend your loan term when you refinance, you can lower your repayments. This is good for those who are struggling to make their regular repayments every month due to their financial situation. Adding additional years to your car loan will lower your repayments and free up some much-needed cash in the shorter term.
- Paying more interest over the term of the loan. Refinancing could well mean you end up paying more interest overall. You may refinance with a lower interest rate but extending the loan term may mean you end up paying more interest. It’s recommended you figure out upfront if it is worth refinancing and if you will be able to afford to pay more in the long run.
- Exit costs and set-up costs. Switching from your current car loan may mean incurring exit costs that you must pay. You may also be liable for administration costs with your new car loan. These are just a couple of examples of the additional costs that you need to consider.
- There may be a negative effect on your credit score if you make one or more applications to refinance. If your current loan has been negotiated on good terms, then refinancing may not be a good option for you.
How you can refinance your car loan
- Check whether you will be charged a fee for closing your loan before the end of the term. If you will be, factor that in when working out any possible savings.
- If you want to go ahead and refinance, it’s a good idea to compare your options from a range of providers. Make sure you meet the eligibility criteria and are aware of all fees and charges. Once you’ve found the right loan to you, visit a provider’s website to apply (assuming that you are doing so online, rather than at a car dealership).
- Select “refinancing” as the loan purpose.
- Submit all the relevant documents and information. This will usually include eligibility documents, information about the lender you’re with and details about the car.
- Pay off your previous loan. This may be done on your behalf by your new lender, but make sure you ask them to confirm the correct process so that you avoid any nasty surprises.
- Close your previous loan. While the loan may be paid off, it’s still important to ensure the loan account is closed.
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