Car Refinancing – The Motorly Guide
What is Car Refinance?
Car refinancing involves taking out a new finance agreement to settle the remaining balance of your current loan under revised terms. This option becomes particularly beneficial when your financial situation has undergone changes since your initial loan application. In this article, we will explore the possibility of refinancing your car and explain the reasons that may prompt you to consider car refinance.
What are the benefits of refinancing?
When you initially entered into a car loan, you agreed upon the monthly payments specified in the contract. However, circumstances may have changed, and the current interest rate might be straining your budget. Refinancing your loan, on the other hand, could potentially enable you to secure a lower rate and therefore reduce your monthly payments.
It is also possible that your credit score has improved since the time you obtained the car loan, opening up opportunities for offers with more favourable interest rates.
While there are certain factors to contemplate when refinancing a car loan, there are also notable benefits to consider:
- Reduced monthly payments: By refinancing your car at improved interest rates or extending the loan duration, you could lower your monthly payments. This can be advantageous if you require extra cash flow.
- Shorter repayment term: If you are comfortable with potentially higher monthly payments, you can opt to refinance with a shorter term, enabling you to pay off your loan sooner. This may result in paying less interest overall. Additionally, you have the flexibility to make overpayments on your car loan at any time if you prefer not to fully refinance.
- Quicker ownership of the car: In PCP and HP finance arrangements, legal ownership of the vehicle is not obtained until the final payment is made. Some drivers choose to refinance using an unsecured personal loan, which grants them legal ownership as soon as the funds are transferred to their current car finance provider.
Are there any issues with refinancing?
- Changes in economic climate: It is important to take into account that as of 2023, interest rates have been on the rise. Consequently, finding a better car loan through refinancing may not be feasible. Before proceeding, it is advisable to thoroughly assess the prevailing interest rates.
- Early settlement fees: When opting to pay off car finance ahead of schedule, it is crucial to consider potential compensation payments for early settlement. These payments could amount to up to two months’ worth of interest. Lenders are obligated to adhere to the regulations outlined in the Consumer Credit Act (CCA), ensuring that you will not encounter any unexpected charges.
- Increased overall interest: If the duration of your new loan exceeds that of your current one, there is a possibility of accruing more interest over the entire contract period. It is essential to carefully weigh the trade-off between lower monthly payments and the potential increase in total payments.
How do I Refinance my car?
Once you have carefully considered the advantages and disadvantages and made the decision to proceed, you can initiate the process of refinancing your car loan.
- Gather necessary documents: Prepare the required documents, such as proof of income, proof of ownership of the car, and identification documents, as specified by the lender.
- Submit application: Apply with Motorly today by clicking here. Ensure that all information provided is accurate and comprehensive.
- Vehicle evaluation: The lender may conduct an evaluation of your vehicle to determine its current market value and condition.
- Approval and agreement: If your application is approved, carefully review the loan agreement provided by the lender. Pay close attention to interest rates, repayment terms, and any associated fees or charges.
- Loan settlement: Upon acceptance of the loan agreement, the new lender will settle your existing car loan with your previous finance provider. Your car will now serve as collateral for the new loan.
What happens if I stop making my payments?
When you decide to refinance your car, it is crucial to maintain regular payments of your loan. The repercussions of not meeting your car finance loan obligations will vary depending on the stage of your agreement and the type of loan you have.
According to the Consumer Credit Act, a lender cannot repossess your vehicle if you have paid more than one-third of the total amount payable unless they obtain a court order.
If you have surpassed this threshold with your current lender, it is important to note that by entering into a new agreement through refinancing, you will lose this protection until you have paid one-third of the new agreement.
Additionally, once you have paid 50% of the total amount payable, you have the right to voluntarily terminate the agreement. This means you can inform your lender of your intention to terminate the agreement, return the car, and have no further financial obligations.
However, when starting a new agreement through refinancing, you will not have the option to voluntarily terminate until you have paid 50% of the total amount payable.
If you find yourself unable to make repayments on your new agreement, it is essential to contact your lender as soon as possible. Lenders are typically willing to work with borrowers to find a suitable solution.
Nevertheless, it is crucial to fully understand any protections you may lose under your current agreement before proceeding with refinancing. Stay informed and be proactive in addressing any financial difficulties that may arise.
Does refinancing a car loan affect your credit rating?
Whenever you apply for a type of finance, your credit score is likely to take an initial hit and may drop. As you start to pay back your loan, this can actually help you improve your credit score.
Any type of on-time finance repayment can help build a positive credit history, so you’ll still be doing this if you’re paying your current finance on time without refinancing.
You might find that your credit score drops after you’ve applied to refinance a car loan, but it’s likely your credit score will build back up if you keep on top of your payments.