If you are a car owner and looking to free up some funds, refinancing your car might be an option worth considering. Refinancing your car can provide you with the opportunity to release equity, refinance a balloon payment or use the equity for other uses.
It could also help to lower your interest rate, term and potentially improve your credit score and utilisation.
Let’s dive into the options and see how refinancing your car can help you.
How does refinancing a car work
Refinancing a car is the process of taking out a new loan to replace your existing car loan. When you refinance a car, you pay off your existing loan with a new loan, ideally with better terms or a lower interest rate. Here is how the refinancing process typically works:
Evaluate your current car loan
Before refinancing your car, it’s important to understand the terms of your current car loan. You should review your loan agreement and determine your current interest rate, monthly payment, and outstanding balance.
Check your credit score
Your credit score is a major factor in determining your eligibility for a new car loan and the interest rate you will qualify for. Check your credit score and credit report to make sure there are no errors and to identify any areas for improvement.
Shop around for a new loan
Once you have evaluated your current car loan and checked your credit score, it’s time to start shopping around for a new loan. You can apply for a loan from a variety of lenders, including banks, credit unions, online lenders or an independent finance broker. A broker will guide you through all your options to find the most suitable refinance product for your circumstances.
Compare offers
After you have obtained quotes for a few loans, compare the offers you receive to find the best option. Consider the interest rate, loan term, monthly payment, and any fees associated with the new loan.
Apply for the new loan
Once you’ve chosen the best loan offer, you will need to complete a loan application with the lender. You will need to provide your personal information, employment information, and information about your current car loan.
Pay off your existing loan
If you are approved for the new loan, the lender will typically pay off your existing loan directly. You may need to provide the lender with your account information or make a payment directly to the existing lender to finalize the payoff.
Make payments on the new loan
After your existing loan is paid off, you will begin making payments on your new loan. Make sure to stay current on your payments to avoid defaulting on the loan and damaging your credit score.
When you should refinance your car loan
Interest rates have dropped
If interest rates have dropped since you took out your original car loan, refinancing can be a good way to lower your interest rate and save money on interest charges over the life of the loan.
You are able to secure a better interest rate
If you are able to secure a better interest rate on your car finance, refinancing your car loan can potentially save you money. It can be a smart financial move to refinance your car loan. Here are some potential benefits of refinancing to a lower interest rate:
Lower monthly payments:
By refinancing to a lower interest rate, you can reduce your monthly car payments. This can help improve your cash flow and make it easier to improve your monthly cash flow and free up funds for other expenses.
Reduced total interest paid
When you can refinance a car to a lower interest rate, you will pay less interest over the life of the loan. This can save you a significant amount of money in the long run, especially if you have a long-term loan.
Shorter finance term
In some cases, refinancing to a lower interest rate can also result in a shorter loan term. This can help you pay off your car loan faster and save even more money on interest charges.
Ability to pay off your car loan early
If you refinance to a lower interest rate and are able to make larger payments, you may be able to pay off your car loan early. This can help you save even more money on interest charges and give you greater financial freedom.
Call us now on 0330 174 8540 for a no obligation discussion
WhatsApp on 07535 812 049
You want access to the vehicle equity
Refinancing your car loan can also provide you with access to equity in the car. This means that you may be able to borrow against the value of the car to pay for other expenses, such as home repairs or medical bills.
It is important to note that the overall cost of refinancing your car loan will likely involve some fees and charges, such as application fees and loan origination fees. You will need to weigh the potential savings from a lower interest rate against the costs of refinancing to determine if it is the right move for you.
If you do decide to refinance your car loan, it is important to shop around and compare offers from different lenders to find the best terms and interest rates for your needs. Make sure you understand all the terms and conditions of the loan before you sign on the dotted line.
Release Equity
Equity in your car is the difference between the amount you owe on your car loan and the current market value of your car. Refinancing your car can help you release this equity by taking out a new loan for a larger amount than what you currently owe on your car. The difference between the two loans is the equity you can use for other purposes.
For example, let’s say you currently owe £10,000 on your car loan, and your car is worth £15,000. By refinancing your car for £15,000, you can release the £5,000 equity and use it for other purposes.
Refinance a Balloon Payment
A balloon payment is a large lump sum payment that is due at the end of the loan term. Refinancing your car can help you avoid this balloon payment by taking out a new loan for the full amount of the balloon payment. This will allow you to pay off the balloon payment in full and spread out paying interest on the repayment over a longer period.
For instance, if you have a £10,000 balloon payment due at the end of your loan term, you can refinance your car for the full amount and spread out the repayment over a new loan term. This can provide you with some breathing room and help you avoid a large lump sum payment that you may not be able to afford.
Use the Equity for Other Uses
As mentioned earlier, refinancing your car can provide you with the opportunity to release equity that you can use for other purposes. This can include home improvements, paying off high-interest debt, or even investing in a new business venture. It’s important to note that using the equity for other uses will increase the total amount of debt you owe and could potentially put you in a worse financial situation if not managed carefully.
You want to change the loan terms
Review your current loan terms
Before making any changes to your car finance loan term, it is important to review your current loan terms. Check your loan agreement to see what your current loan term is and what your monthly payments are.
Determine your new loan term
Once you have a good understanding of your current loan terms, you will need to decide on a new loan term. If you want to lower your monthly payments, you may want to extend the loan term. If you want to pay off the loan more quickly and save on interest charges, you may want to shorten the loan term.
Contact your lender
Once you have determined your desired loan term, you will need to contact your lender to discuss your options. Your lender may be able to offer you a new loan with the desired loan term, or they may be able to modify your existing loan to change the loan term.
Consider the costs and benefits
Before making any changes to your loan term, it is important to carefully consider the costs and benefits. Extending the loan term may lower your monthly payments, but it will likely increase the total amount of interest you pay over the life of the loan. Shortening the loan term may increase your monthly payments, but it will help you pay off the loan more quickly and save on interest charges.
Complete the necessary paperwork
If you and your lender agree to a new loan term, you will need to complete the necessary paperwork to finalize the change. This may include signing a new loan agreement or modifying your existing loan agreement.
Removing or adding a co-borrower
If you want to remove or add a co-borrower on your car finance, you may be able to do so by refinancing your car loan. Here is what you need to know:
Removing a co-borrower
If you want to remove a co-borrower from your car finance, you can do so by refinancing the loan in your name only. This can be a good option if you want to take sole responsibility for the loan payments or if the co-borrower’s credit score is negatively impacting the interest rate you are able to qualify for.
When you refinance the car loan, you will need to provide documentation that shows you’re able to make the monthly payments on your own, without the co-borrower’s income. This may require you to have a good credit score, stable income, and a solid payment history on your car loan.
Adding a co-borrower:
If you want to add a co-borrower to your car loan, you can also do so by refinancing the loan. Adding a co-borrower can be a good option if you want to improve your chances of qualifying for a lower interest rate or if you want to share the responsibility of making payments on the loan.
When you refinance the car loan, you will need to provide documentation that shows the current lender and co-borrower’s income and credit history. The co-borrower will also need to sign the loan documents and agree to take joint responsibility for making payments on the loan.
It is important to carefully consider the costs and benefits of adding or removing a co-borrower before making a decision. Removing a co-borrower may result in a higher interest rate if your credit score or income is not strong enough to qualify for a low rate on your own. Adding a co-borrower may improve your chances of getting a lower rate, but it also means that you will be jointly responsible for making payments on the loan.
Call us now on 0330 174 8540 for a no obligation discussion
WhatsApp on 07535 812 049
Your credit score has improved
If your credit score has improved since you originally financed your car, you may want to consider refinancing your car loan. Here are some potential benefits of refinancing with new lender with a higher credit score:
Improved credit score
By making your car payments on time and in full, you can improve your credit score over time. This can help you qualify for even better interest rates on future loans and credit products. If your credit score improves you may be eligible to apply for refinance with better terms.
If your credit score has improved since you took out your original car finance, you may be able to qualify for a lower interest rate by refinancing. This can help lower your monthly payments and save you a good deal of money in the long run.
If you bought the car less than 6 months ago
Refinancing a car loan after initial purchase can be a good idea if you can secure a lower interest rate or better loan terms. However, whether you should refinance your car loan less than 6 months after buying it depends on several factors, including:
Prepayment penalties
Some car loans come with prepayment penalties, which are fees charged if you pay off the loan early. If your loan has a prepayment penalty, refinancing your car loan within 6 months of buying it could result in additional costs that outweigh any potential savings.
Fees and charges
Refinancing a car loan typically involves fees and charges, such as application fees and loan origination fees. If these fees are high, they could negate any potential savings from a lower interest rate.
Length of the loan
If you bought your car less than 6 months ago and took out long-term finance, such as a 48-month or 60-month agreement, refinancing the loan early may not be the best idea. This is because a significant portion of your monthly payments in the early months of the loan goes towards interest charges, and refinancing the loan too soon may not allow you to save enough on interest charges to make it worthwhile.
Credit score
If your credit score has improved significantly since you originally took out the car loan, refinancing the loan could result in a lower interest rate and monthly payments. However, if your credit score hasn’t changed much in the past few months, you may not qualify for significantly better loan terms.
In summary, if you’re considering refinancing your car loan less than 6 months after buying the car, it’s important to weigh the potential savings from a lower interest rate against any fees or penalties associated with refinancing. If you’re unsure whether refinancing is the right move for you, it’s a good idea to speak with a finance broker.
You want to improve your financial flexibility
With lower monthly payments and less total interest paid, refinancing your car loan can help improve your overall financial flexibility. You may be able to redirect the savings towards other financial goals or invest the money in other areas.
You want to improve your credit utilization
Refinancing a car loan with a lower interest rate can also help improve your credit utilization ratio, which is an important factor that lenders consider when determining your creditworthiness.
Your financial situation has changed
If your financial situation has changed since you took out your original car loan, refinancing can help you adjust your monthly payments to better fit your budget. For example, if you’re experiencing financial hardship, you may be able to refinance to lower your monthly payments and make them more affordable.
What could happen to your monthly payments
Refinancing a car can have a significant impact on your monthly payments. Here are some possible outcomes:
Lower monthly payments:
One of the main reasons people refinance their car loans is to lower their monthly payments. By refinancing at a lower interest rate, you can reduce your monthly payment amount. This can help improve your cash flow and make it easier to manage your finances.
Higher monthly payments:
In some cases, refinancing a car loan can actually result in higher monthly payments. This may happen if you refinance at a higher interest rate, choose a shorter loan term, or roll over fees and charges from your previous loan. It’s important to carefully review the terms of any refinancing offer to make sure it makes sense for your financial situation.
Similar monthly payments:
Depending on the terms of your new loan, your monthly payments may stay roughly the same after refinancing. However, even if your monthly payment doesn’t change, you may still be able to save money over the life of the loan by reducing your interest rate or shortening your loan term.
Longer loan term:
Refinancing a car loan can also result in a longer loan term, which may lower your monthly payments but increase the total amount of interest you pay over the life of the loan. It is important to consider the trade-offs between a lower monthly payment and a longer loan term before making a decision.
In conclusion, refinancing your car can provide you with various benefits such as releasing equity, refinancing a balloon payment, or using the equity for other uses. Before deciding to refinance your car, it is essential to evaluate your financial situation, research the best loan options, and ensure that the benefits outweigh the costs. It is also recommended that you seek advice from a finance professional to determine if refinancing your car is the right choice for you.
Refinancing to a better interest rate can result in lower monthly payments, less total interest paid, a shorter loan term, an improved credit score, and the ability to pay off your car loan early. It is important to carefully consider the costs and benefits of refinancing before making a decision, and to shop around to find the best interest rate and loan terms for your needs.
Let us help you
Contact us today on 0330 174 8540 and learn about the best car financing options to help you drive away in your next dream car. Take the first step towards getting approved for luxury car finance now.
WhatsApp on 07535 812 049
