Ins and outs of car refinancing

Is it better to refinance a vehicle or not?

In an effort to de-mystify what this means, and who should consider it as a viable option, it is important to understand the term.

In a nutshell, refinancing a vehicle means replacing your current car loan or finance agreement with a new one 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.

This saving can result from obtaining a loan at a lesser amount, extending the repayment period, or negotiating 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 encompasses, and when to – or when not to – refinance a vehicle,” explains Lebogang Gaoaketse, head of marketing and communication at WesBank.

“There is one school of thought that advocates that you should consider selling your car before you look at refinancing it. However, it’s not always that simple a decision to make.

“If the new loan is at a lower interest rate, for example, that could save you some money in the long run.”

Refinancing a vehicle is a good option for some people, particularly 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 to do some homework for the best loan terms and interest rates before making a final decision.

Advantages

• Refinancing can result in lower monthly payments, which could assist those who are struggling to cover monthly costs or want to free up a bit of extra cash each month
• If you qualify you will save money by paying less interest over the loan term and save on your current monthly instalments
• Refinancing allows you to adjust the terms of your loan, such as the length or type of loan – fixed or variable, for example
• Refinancing might enable you to access more cash if you owe less than its current value
Disadvantages
• Refinancing often involves fees, such as loan application fees or prepayment penalties. These can add up and reduce the potential savings from refinancing
• If you extend the length of your loan through refinancing, you may end up paying more interest over the term of the loan, even with a lower interest rate
• If you owe more on your vehicle than it is worth, refinancing may not be an option or may not result in significant savings
• Applying for a new loan can temporarily lower your credit score; if you are approved for a loan with a higher interest rate, it could hurt your credit score.

Here is an example of how refinancing can benefit you financially:

If you bought a 2008 double cab that cost you R200 000, your monthly instalment would be R4 650 over 72 months at a 16% interest rate.

Refinancing it over the same term at 12% interest would reduce the monthly instalment to R2 950, benefitting your monthly budget with a saving of R1 700.

There isn’t a one-size-fits-all solution to structuring a car finance deal.

By being honest with yourself and knowing how much you can afford on the repayment, you are on the best-informed path to paying off your car.

As a responsible lender, WesBank will provide credit only for an amount you can afford to pay back.

“If you are considering refinancing a vehicle, there are some factors to consider to ensure it is the right time to do so,” continued Gaoaketse.

“One is when interest rates drop, as there is a possibility that rates are lower 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.”

He said another indicator is if your current financial situation has improved.

“If you are earning a higher monthly salary and able to repay some outstanding debts, your credit score will improve.

“A stronger financial position could result in a more favourable loan term 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,” he concluded.

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