How to compare car refinancing offers: What to look for?

When a car owner in the Philippines is looking for ways to optimise their loan payments or improve their cash flow, the only solution is to go for car refinancing.

Moving on, many financial institutions are offering various car refinancing packages, making it essential for an applicant to understand ‘what to look for’; this will help borrowers make a well-informed decision. We have curated this guide to help you walk through the car financing world with ease and understand the basics, like -

• What is car refinancing?
• Why it can be beneficial
• Pros and cons
• How to compare car refinancing options

So, let’s get started.

What is car refinancing?

Car refinancing refers to replacing your current car loan with a new one, usually through a different lender, all to secure better terms or lower monthly payments.

Now, you might be wondering how it works. Well, the new car loan pays off the balance of the borrower’s existing loan, effectively “refinancing” the debt. Note that the process can be advantageous if -

• Interest rates have lowered.
• The applicant's financial situation has improved.
• The applicant wants to extend his/her loan term to reduce monthly payments.

Why is car refinancing good?

As discussed above, car refinancing can provide several benefits, particularly to applicants under tough financial circumstances or seeking better loan terms. Some of its benefits include -

Car Refinancing Benefits
Lower interest rates	If market interest rates have decreased since you first obtained your car loan, refinancing can help you secure a lower rate, potentially saving you significant money over time.
Reduced monthly payments	Extending the term of your loan can lower your monthly payments, freeing up cash for other expenses.
Flexible loan terms	Some refinancing offers come with flexible terms that can be customized to better fit your financial situation.
Access to equity	Cash-out refinancing allows you to access the equity you have built up in your car, providing funds for other needs.

Pros & cons of car refinancing

Like every financial move, car refinancing has its fair share of pros and cons. An applicant needs to understand both sides clearly to make an informed decision. First, let’s go through the pros.

Car refinancing pros -

• Lower interest payments: By obtaining a loan with a reduced interest rate, you pay less over the life of the loan.
• Improved cash flow: Refinancing to a loan with lower monthly payments can provide immediate financial relief.
• Debt consolidation: Some car refinancing offers allow you to consolidate multiple debts, simplifying your financial obligations.

Car refinancing cons -

• Extended loan term: While lower payments sound appealing, extending your loan term may mean paying more interest over the long term.
• Potential fees: Refinancing can come with fees, such as origination fees or penalties for paying off your original loan early.
• Equity risks: Cash-out refinancing might reduce your equity in the car, potentially leading to negative equity (owing more than the car’s value).

Types of car refinancing options

The Philippines offers several types of car refinancing options provided by banks, credit unions, and specialised car loan institutions. Here’s a breakdown of common types:

• Standard loan refinancing

This is the most straightforward option, where you switch from one lender to another for better loan terms. Prominent banks such as BDO, Metrobank, and Security Bank offer car refinancing products tailored to meet diverse customer needs.

• Cash-out refinancing

Under cash-out refinancing, the borrower can refinance the car loan and borrow against the equity in the car. This option is perfect for those who need immediate funds for other financial needs but should be used cautiously to avoid negative equity.

• Online loan platforms

Several fintech companies and online loan platforms in the Philippines, like Lendr and LoanSolutions, allow borrowers to compare different car refinancing offers easily.

Comparing car refinancing offers

After understanding the basics, if you decide to go for car refinancing, then here are a few things/factors to consider to ensure you get the best deal.

Interest rate	Fixed or Variable: Decide whether a fixed or variable interest rate is better for your financial situation. Fixed rates provide stability, while variable rates may start lower but could increase. Compare: Always shop around and compare the interest rates offered by different lenders. Even a 1% difference in the interest rate can lead to substantial savings over the term of the loan.
Loan term	Duration: The length of the loan can impact your monthly payments and the total amount of interest paid. While a shorter term comes with higher monthly payments but lower total interest, longer terms offer lower payments but may cost more in the long run. Flexible terms: Some lenders provide customizable loan terms. Check if the lender offers flexibility that matches your financial needs.
Fees & Penalties	Processing fees: Some banks charge a processing fee. Make sure to account for these additional costs when comparing offers. Early payment penalties:  Some lenders may have a penalty for early repayment. If you plan to pay off your loan early, ensure that your refinancing deal allows it without extra charges.
Application process	Ease of process: Do check whether the lender offers a seamless online application process or if you need to complete paperwork in person.  Processing time: Some lenders may take longer than others to approve your refinancing request, which can be a factor if you need quick access to funds.
Customer support & reviews	Reputation: Go through reviews and testimonials from other customers about the lender’s reliability and customer service. After-sales service: Check the lender's customer support service, like options for payment adjustment, account management, and more.

 

Step-by-step guide to compare car refinancing options

Step 1: Gather multiple quotes
Reach out to at least three lenders, including a mix of traditional banks and online platforms.

Step 2: Review loan terms
Compare not only the interest rate but also the loan term and repayment options
.
Step 3: Assess the total cost
Calculate the total cost over the loan term, including all fees and potential penalties.

Step 4: Check for promotions
Some banks offer promotional rates or waived fees for a limited time. Keep an eye out for these deals.

Step 5: Seek financial advice
In case of any confusion, it is advisable to consult with a financial advisor to understand the long-term implications of refinancing your car.

Bottom line

Car refinancing in the Philippines can be a powerful tool for managing your finances more effectively. By understanding its benefits and drawbacks, knowing what to look for in an offer, and thoroughly comparing available options, one can make the best choice for his/her financial future.

We’d recommend you take time to assess your needs, seek multiple quotes, and consult with experts if necessary to maximise the benefits of car refinancing.

Also Read: How to negotiate the best interest rate for your car loan