Ina Opperman

By Ina Opperman

Business Journalist

Thinking of refinancing your car? Here’s what to consider first

Cash-strapped and overindebted consumers have to make plans to survive in tough economic times? Is refinancing an option?

Many consumers wonder if now is a good time to refinance their vehicles with inflation and interest rates continuing to increase.

With the repo rate increasing every two months, their instalments also increase and while food prices also keep increasing, the extra few rands in your pocket can really make a difference.

Refinancing a vehicle means replacing your current car loan or finance agreement with a new car loan to revise your debt repayment schedule. Applying for another loan to repay your old debt is known as refinancing.

As the new loan is usually lower than your existing loan, vehicle refinancing may be a way to ‘save’ money on your monthly car repayments. You can also extend the repayment period or negotiate a lower interest rate. Some banks and lending houses also offer the option of refinancing a vehicle that is fully paid up should it qualify.

“It is important to understand what the term means and when to refinance a vehicle or not.

There is one school of thought that advocates you should rather consider selling your car before you look at refinancing it, but that is not always a simple decision.

“If the new loan is at a lower interest rate, for example, that could save you some money in the long run,” explains Lebogang Gaoaketse, head of marketing and communication at WesBank.

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When refinancing is a good option

Refinancing a vehicle is a good option especially if it results in lower monthly payments or a lower interest rate. However, it is important to carefully consider the potential advantages and disadvantages and do some homework for the best loan terms and interest rates before making a final decision.

Gaoaketse says the advantages of refinancing your vehicle are:

  • Lower monthly payments that can help people who are struggling to cover their monthly costs or who want to free up a bit of extra cash each month.
  • Lower interest rates if you qualify will save money by paying less interest over the loan term and therefore save on your current monthly instalments.
  • Better loan terms, such as the length of the loan or the type of loan that can be fixed or variable.
  • Improved cash flow if you owe less than its current value.

He says the disadvantages are:

  • Additional fees charged for refinancing, such as loan application fees or prepayment penalties that can add up and reduce the potential savings from refinancing.
  • A longer loan term that means you will pay more interest over the term of the loan, even if you have a lower interest rate.
  • Negative equity if you owe more on your vehicle than it is worth.
  • Credit score impact because applying for a new loan can temporarily lower your credit score and if your new loan has a higher interest rate, it could hurt your credit score in the long term.

Gaoaketse uses this example to show how refinancing can benefit you financially.

If you bought a 2008 double cab that cost you R200 000, your monthly instalment would be R 4 650 over 72 months at an interest rate of 16%. Refinancing it over the same term at 12% interest would reduce the monthly instalment to R2 950, benefiting your monthly budget with a saving of R1,700.

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Not a one-size-fits-all solution

However, he warns that the is not a one-size-fits-all solution to structuring a car finance deal.

“If you are honest with yourself and know how much you can afford on the vehicle repayment, you are the best-informed to choose the best way to pay off the car. As a responsible lender, WesBank will also only provide credit for an amount that you can afford to pay back.”

Gaoaketse says if you consider refinancing a vehicle, consider:

  • Whether interest rates are decreasing as there is a possibility that rates are lower now than when you had your car financed initially. Current rates are almost half of what they were in 2018, so if you took out a car loan then, refinancing could be an option to save on your loan.
  • If your current financial situation has improved. If you earn a higher monthly salary and can repay some outstanding debts, your credit score will improve.
  • A stronger financial position could result in more favourable loan terms if you apply for refinancing.

“At the end of the day, you need to assess your situation and make the most informed financial decision based on that assessment,” Gaoaketse says.

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