Need better auto loan terms? Here’s how to refinance

It begins with buying a car and consequently taking a car loan to finance this big purchase. With car financing, you need to make an early down payment, which is mostly 20% of the purchase price, followed by monthly payments for a fixed period. Now, it is possible that the pre-decided loan terms aren’t working for you anymore, and you are finding it hard not to be a defaulter.

In such cases, it is obvious to look out for alternative options that offer much-needed relief and ensure no negative impact on your credit score. So, is there a way out? The answer is YES, and it comes as Loan Refinancing. However, it shall be noted that it is not always the path to choose, but given the right conditions/circumstances, it can be a game changer, helping you better manage your finances.

So, what can you expect when you get your car loan refinanced? Under the right circumstances, this financial tool offers several reliefs including -

• Low interest rate
• Affordable/manageable monthly payments
• Better overall loan terms

Great, isn’t it? But is it the right move for you in your current financial standing? To find the answer to this question and many more such queries related to loan financing, we’d recommend you to read this article till the end. Once done, you’d know everything there is to know about this particular financial tool. So, let’s begin.

Understanding car loan refinancing

What is car loan refinancing? It is a debt management strategy involving taking out a new loan to pay off the ongoing car loan.

 

This tool is opted for by a car owner with the prime objective of managing his/her finances better. How? As mentioned above, by securing a low interest rate and monthly payments. For a Filipino car owner with an ongoing car loan, refinancing can work when there is a shift in his/her financial situation or a change in market conditions.

You must be wondering how car refinancing helps. Well, depending on the applicant's need, refinancing can help in either of the two ways -

• Help applicants pay off the existing loan early
• Increase the loan repayment time by making monthly payments more manageable

While the former will reduce the overall cost of borrowing substantially, the latter will spare you some extra money that you might require to fulfill other commitments.

Also Read: How to budget for your car loan repayment effectively

Car loan refinancing - When to consider

Despite all its benefits, refinancing is not everyone’s cup of tea. As we talked earlier, this financing toll will only prove beneficial when the circumstances are right, which are listed below -

• Higher-income - In cases where your income has increased from the time you took the loan, refinancing can help you pay off the loan faster, leading to great savings.
• Found a loan with a lower interest rate/favorable terms - Refinancing is a great option when you have managed to find a loan with a much lower interest rate (due to changes in the market scenario) compared to the original loan.
• Hit by financial hardship - In times of financial distress wherein you are struggling to pay your current bills, refinancing comes as a blessing by extending the loan term, and lowering the monthly payment. However, it shall be noted that this will result in the overall cost of the loan.
• Better financial standing - In case your credit score has improved since you last took the loan, you might qualify for a lower interest rate via refinancing.

Overall, it is essential that you evaluate the following three things before signing up for refinancing -

• Current market conditions
• Existing loan terms
• The general health of your finances

Car loan refinancing - Pros & cons

Now that you have learned about things to consider before opting for refinancing, we'd also weigh the pros and cons. Yes, like most financial tools, loan refinancing too has its fair share of advantages and disadvantages which a potential applicant needs to know.

Let’s check out the pros and cons of car refinancing -

Pros - It allows you to secure a loan with a low interest rate, which will result in several other benefits as mentioned below. You’ll get to enjoy lower monthly payments, thus having extra cash to fulfill other obligations. Note, this is a possibility wherein you opt for an extended loan term. There is also the option to reduce the loan term, this will result in quicker debt payment, and ultimately saving on interest. Debt consolidation sometimes happens with refinancing, wherein multiple debts are consolidated into a single payment, this makes your overall financial management quite simple.

Cons - Did you know that when applying for car refinancing, lenders tend to heavily probe into your credit history? This act negatively impacts the credit score and gives a temporary hit. It is therefore recommended to maintain a good score that can withstand a short fall. One needs to be cautious of the hidden fees like administrative and processing fees that are associated with refinancing. Prepayment penalties are a thing that most lenders charge you with in case of an early loan repayment. Make sure to check that refinancing does not trigger such a penalty, or else it’ll negate your potential savings. Negative equity, this will happen if your car loan balance is more than your vehicle’s full value.

 

Also Read: Should you finance a car? Weighing the pros and cons

Car refinancing - Step-by-step guide

Follow the steps mentioned below to ensure your application gets approved for refinancing your car loan -

Step 1. Review your current loan contract

The first step is to go through your loan application thoroughly and get a clear understanding of the following information -

• Monthly Payment
• Interest rate
• Remaining balance
• Remaining number of payments

Why? It will help you compare your current loan terms against that of refinancing, and see if the latter helps improve your financial situation or not.

Step 2. Access your financial health

In addition to reviewing your current loan agreement, it is also important to thoroughly examine your financial standing. Refinancing only makes sense when you have a strong credit score and a stable income - both of these things will help attain a better refinancing deal. Here’s what needs to be done -

• Check your credit report; if the score is low, make efforts to improve it, as the higher the score, the lower the interest rate will be.
• Calculate the debt-to-income ratio (DTI), a ratio of 35% or lower assures your chances of approval.

Step 3. Find out the market value of your car

Your car's value, age, and mileage play a crucial role in determining whether you’ll be able to refinance your loan or not.

• An old or high-mileage car is difficult to refinance.
• Used cars are difficult to refinance.
• A new car with low mileage has a higher chance of approval.

Note, that you can check your car’s worth by checking similar listings on different sites.

Step 4. Get the documents ready

It is essential to prepare a few necessary documents to refinance your car loan. While the list may vary with the lender, there are a few basic requirements which are mostly included -

• Driver’s license
• Vehicle identification number
• Vehicle registration
• Vehicle’s make, model, mileage, and year of manufacture
• Copy of original loan contract
• Proof of insurance
• Proof of income & employment
• Remaining loan balance and loan term
• Current monthly payment
• Loan payoff statement
• Loan interest
• Proof of residence

Remember to always enquire about the full list of required documents from the loan provider in advance. Further, check out the eligibility requirements ahead of time, some universal criteria include -

• Being a Filipino citizen
• Applicants aged between 21 and 65 years at the time of loan maturity
• Stable source of income

Step 5: Research and compare

It is in your favor to shop around and get quotes from different lenders. Get information on parameters like - refinancing rate, monthly payments, and repayment terms. Next, compute potential savings per lender and shortlist the most beneficial offers on the table.

Further, check if it is possible to get pre-qualification for your car loan refinancing. Though it doesn’t guarantee approval, it helps cancel out lenders that reject you in this early phase.

Step 6. Apply for refinancing

• Visit the lender, through offline or online mode.
• Fill out the application form and submit all the required documents.
• Next, the lender will review your financial capacity, appraise your vehicle, and check your credit score.
• Wait for a few days to a couple of weeks for notification of approval.
• Upon approval, the lender will either pay off your loan and issue the agreed loan payment terms or disburse the loan amount to your bank account, leaving you with all the payment responsibility.

Step 7. Be responsible

Refinancing comes as a second chance to sort your finances, therefore, it is essential to be extra careful this time around. You can do so by guaranteeing timely monthly payments, and setting up an automatic payment agreement with your bank will ensure the same.

Car refinancing - Things to consider

To make sure that car refinancing benefits you at all costs, there are a few scenarios to check which may impact your eligibility for refinancing. The list includes -

• When the loan balance is greater than the car’s value.
• Only a short period is left for loan repayment.
• Timely payment is not your thing.
• Your current loans have a steep prepayment fee.
• Your car’s age and mileage make it ineligible for refinance.
• When you are planning for a mortgage shortly.
• Better interest rates and payment terms aren’t available.

Also Read: Pitfalls to avoid when refinancing auto loan in the Philippines

Bottom line

Overall, car refinancing is an essential financing tool provided by lenders to borrowers. In times of difficulty, it offers relief in the form of lower interest rates, reduced monthly payments, and better overall loan terms. However, it is not all roses. It is essential to carefully evaluate all the lenders and understand potential risks before picking the lender with the best deal on offer.

Also Read: Car Loan Restructure: Everything a Filipino needs to know before applying