Can refinancing help pay off my car loan at lower repayments?
Can I get a loan to pay off my car loan for lower payments?
- A loan to pay off loans? Yep – the idea can save thousands of dollars. Here’s how…
It’s called REFINANCING. Refinancing loans is pretty common and pretty doable. The basic idea is getting another loan to pay out the loan you have. The potential benefits – lower monthly repayments, lower interest rates, more time to pay it off and even reducing risk to your credit score.
What is refinancing?
In a nutshell – borrowing money from a new lender to pay off your existing car loan, cutting ties with whoever that original car loan was with. Then, paying back the new lender instead of the old one. Of course, you’d only do this if the new lender offered a better deal.
People take this option for a number of reasons. The main one, interest rates. Remember, interest rates are based on the amount of money you owe – so the percentage remains the same while the actual dollar amount goes down as you repay the loan.
For example, you take out a $20,000 loan with a 12% p.a. interest rate. You pay back $400 per month.
- The interest on the FIRST payment is: 12% of $20,000.
- The interest on the SECOND payment is: 12% of $19,600 – as you’ve made your first $400 repayment.
After you’ve paid back $5,000 of the $20,000 for example, you decide to refinance. As you haven’t missed any repayments, a new lender offers you an 8% interest rate. You borrow $15,000, repay the original lender (who misses out on some interest to your benefit), and you’re left paying 8% instead of 12% on the remaining $15k, saving you money.
There are other reasons too, here are some of them:
Longer loan term:
If your repayments are higher than you can afford, extending the loan term by refinancing will allow you more time to pay it off. This will reduce the amount you have to pay each time you make a payment. Simply, $5,000 paid back over 1 year will have higher repayments than $5,000 over 2 years.
Add or remove a co-signer:
You may have changed your financial situation for the better and no longer require a co-signer. With that new job or higher income, a refinance deal will allow you to remove whoever agreed to cover you by being a co-signer. On the other hand, you may want to add one in order to get better rates or perhaps a negative financial situation demands one.
Get a new lender:
If your relationship with a lender has soured for whatever reason, a new one might clear the air. Refinancing will allow you to make a fresh start with a new lender. Don’t forget, there are many lenders who are ready to work with you..
If a borrower’s current loan repayments are becoming too much of a burden, a credit score can be at risk. Missed or late payments really hurt a credit file so extending the loan term and reducing the amount each month or fortnight will keep it safe. Often people choose to refinance in order to avoid financial hardship or falling behind on their loan obligations.
So are there any negatives of refinancing?
Yes, there can be. Here are a few to think about…
Paying more in interest:
If a borrower refinances in order to reduce repayment amounts by extending the loan term, it can attract more money paid on interest even with a lower percentage. This is because you’ll have more money owing for a longer period of time. Just make sure to do the maths yourself to be sure you’re making the right decision.
Entry and exit fees:
Loans have fees attached other than only interest rates. Application fees and establishment fees for example. You may have already paid them to your original lender and have to pay them again to the new one. Furthermore, some lenders charge early repayment and exit fees to prop up their profits in the event someone pays the loan back faster than expected as they’ll lose profit on interest paid. Again, make sure you compare your options and do your research.
How about debt consolidation?
The idea is pretty similar and the benefits can be the same. The difference is:
Debt consolidation involves taking out another loan to pay off multiple loans.
Refinancing involves replacing one debt with another.
How do I know if refinancing is for me?
Does refinancing sound like a good idea for you? If one of the above mentioned benefits can work for you, try our Loan Calculator or talk to one of our experienced and friendly brokers today for a no-obligation quote on how to improve your loan.