Car refinancing is a tricky term because there are multiple reasons why people do it – some may opt for refinancing options simply because they intend to settle their car loans early, while others want to reduce their financial burden – both of these reasons lead to one main purpose, which is a lowered interest rate.
Essentially, when you buy your car with a loan, you are borrowing money from the bank and the interest rate is the additional cash you have to fork out on top of the actual car price. Hence, a lowered interest rate means you pay the bank less.
Refinancing a car loan usually involves two types of loans, namely vehicle loans or housing loans. Now, before you decide on whether this is for you, you will need to understand the minor details.
What does Car Loan Refinancing Mean?
Car loan refinancing refers to the process of applying for a new loan from a bank or financial institution to settle the balance of an existing car loan. What this basically means is that you’ll be applying for a new loan to pay off your remaining balance but with a lower interest rate, which means reduced monthly installments and less money out of your pockets. Refinancing also has longer repayment periods.
Is There a Need to Refinance Your Car?
The decision to refinance a car solely depends on your needs. You should consider financial factors such as your current financial status, the purpose of the refinance, your monthly cash flow, among others.
You may also want to consider the following before deciding to refinance your car loan.
- Decreasing Loan Interest Rates
Typically, fluctuations of interest rates depend entirely on the current economic situation. Even if the interest rate decreases between two and three percent, you would definitely save a lot on your loan. For example, if your original loan is RM103,337.50 with an interest rate of seven percent and a loan term of 60 months, the total loan amount you would be paying is RM122,773.22.
After a year, your loan balance should be around RM86,803.50. If you decide to refinance, you can get a new loan (based on the current balance) with a lower interest rate and a shorter repayment period. This means you will pay off the new refinancing debt at a lower monthly amount, which saves you much more in the long run.
- Current Financial Status
Financial institutions usually consider a number of other factors including your credit score for the past 12 months, and your debt-to-income ratio (DTI). The DTI ratio is usually calculated by dividing your total monthly income by your existing monthly commitment.
In other words, if you are currently financially stable, this can help you refinance your loan at a more competitive rate. Good credit health and a low DTI ratio, will allow you to secure a better refinancing loan as banks are much more confident in your repayment ability.
- Delay in Repayment
If you are undergoing financial problems that are interfering with your loan repayment schedule, you may want to consider getting a loan refinancing with a lower interest rate. If not, you can also consider refinancing your car loan with a longer repayment period to help you cope with your monthly installments. But do keep in mind that with a longer repayment period, comes higher interest rates.
How to Refinance Your Car Loan
If you are thinking about refinancing your car loan, here is what you will need to do.
1.Required Documents
- Personal information such as your identity card and driver’s license.
- Proof of income such as payslips, proof of employment, or income tax return forms.
- Car registration information such as a grant, insurance, VIN number, and mileage.
- Details of the existing loan – monthly installment, current balance, payment period, and interest rate of an existing loan.
2.Check Your Credit Score
Check your credit score report before applying for loan refinancing you can check your credit score by getting it from Bank Negara Malaysia, Credit Counseling and Management Agency, or other relevant agencies for free.
If you have a good monthly repayment record and are diligent with making your payments on time for more than a year, you probably have great credit health. Hence, with that, your loan refinancing can be easily approved.
3.Make an Application
You are also advised to apply for a refinancing loan from multiple banks or financial institutions so that you can compare their interest rates and advantages. However, make sure to submit all your loan refinancing applications within the 14-day period.
4.Estimate the Current Value of the Car
In general, car depreciation also plays a role in determining the status of your application. Many car owners find that the current value of the car is lower than the current balance of the loan. If this happens, it may affect your refinancing application negatively as there is a possibility of rejection.
To make things easier, you can estimate the current value or the market value of your car by using a refinancing calculator available online. If the current value of the car is higher than the existing loan balance, you may then go ahead and apply for a refinance for your car loan.
5.Identify the Loan Period
- Shorter loan period – For a shorter loan repayment period, you can choose to keep paying that same amount as your previous loan to clear off your debt faster,
- Longer loan period – If you are cash-strapped with a limited budget, and your main reason for refinancing is done to reduce your financial burden, you can opt for a longer repayment period as this will lower your monthly installment. Of course, as we have mentioned, a longer repayment period means you’ll be paying a higher interest rate.
6.Submit Your Documents
Fill in all the required documents and complete the application from your chosen banks or financial institution and submit it. . When you have all your bank loan offers, choose one that matches your needs such as a lower interest rate or a longer repayment period – this all depends on you.
Once a car loan refinancing application is complete, you will be required to start paying your monthly installments according to the new refinance terms while the bank will settle the balance of your old loan.
Advantages and Disadvantages of Refinancing Your Car Loan
Advantages
- Reduced interest rates – Lower interest rates can decrease your monthly payment and the total interest you pay during your loan period. If your current loan’s interest rate is higher than the rates you might qualify for, consider a refinance. Lowering your payment by even one or two percent can make a difference and save you money in the long run.
- Reduce the weight of your financial commitments – This loan refinancing plan provides additional benefits especially to individuals with high monthly financial commitments. Since refinancing your car loan will help you clear off your existing loan with a lower interest, you can use the extra money for your other commitments.
- A financial commitment that fits you– In general, refinancing gives you the option to select the appropriate financing package according to your financial needs. You will be given a fixed interest rate throughout the term of the loan if you choose a fixed interest rate. However, if you choose a variable interest rate, the interest rate charged is subject to the country’s current economic changes.
Disadvantages
- It could increase your overall debt – This loan refinancing option is a great alternative to improve cash flow especially for individuals facing financial difficulties. The extended financing period indirectly results in a lower monthly installment amount. However, a longer repayment period causes higher interest rates and that will result in you paying much more than you should.
- Incur additional liability costs – Loan refinancing especially for cars is very risky. Apart from having to bear the rising cost of petrol prices and toll rates, you also have to face additional liabilities such as maintenance costs especially after three to five years of ownership. This is because vehicles will usually start to experience problems after a period of four to five years which will indirectly affect your cash flow.
So, Should You Refinance Your Car Loan?
Refinancing your car loan has both advantages and disadvantages. Nevertheless, it is an alternative that could resolve your financial burden or lessen your financial commitment.
However, whether you should be doing it, is up to you. Make sure you take into consideration your current financial status and the purpose of the refinance. Make sure to do your own research, compare the various bank loans, and study the refinancing terms before you make your final decision.
Read also: What is Your Car Market Value & its Depreciation Rate in Malaysia?
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