When the economic climate or your personal circumstances change, it’s a good idea to review your finances. Refinancing your car loan is one of the things you could consider. But is it a good idea, or should you pay off your existing loan?
In general, you should opt for the latter. By refinancing your debt, you’re extending your loan term and you’ll end up paying more. Lenders will also charge you refinancing fees which will add to the total repayment amount.
If you’ve thoroughly considered all refinancing offers and you still want to go ahead, it would be best to do so only under the following conditions.
Tip: Check which financial products you qualify for by visiting this page.
Your credit score has improved
If you’ve been paying your monthly instalments diligently, your credit score will have improved. That means you’ll likely be offered lower interest rates. Your credit score determines the level of risk you pose to lenders. If it’s bad, you will not get credit or your interest rate will be extremely high. If it’s good, you’ll pay lower interest rates.
You’re guaranteed lower interest rates
Before you refinance your loan, shop around for the lowest possible interest rates. Remember, your credit score will have a significant impact on the interest rates you’re offered, even if you choose a different lender.
Your cash flow will improve
You can arrange to pay lower instalments by extending the term of your loan. You’ll have more money in your pocket to cover your daily expenses, but be aware that you’ll be paying more over the life of the loan.
Your debt-to-income ratio has improved
One of the factors that determine whether you qualify for a loan is your debt-to-income ratio (DTI). If your debt obligations exceed your gross income, your chances of getting a loan are low. If your DTI is more than 40% you should work on increasing your income, either via a salary increase or by finding a side job to supplement your salary.
Your car resale value is high
The last factor to think about when refinancing your car is its resale value. A car is a depreciating asset, which means it loses value as soon as it leaves the dealer. It’s important to consider refinancing while your car still in good condition and its mileage is low. Lenders won't readily refinance your car if it’s worth less than the remaining loan balance.
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