Last Updated on May 27, 2023 by Anjali Chourasiya
Has it ever happened that you took a car loan at a particular rate of interest, later saw another financial institution offering a car loan at a better rate, and regretted your earlier decision? You would be glad to know that there is something you can do to alter the situation. It is called refinancing. Read on to find out about what refinance car loans means, eligibility criteria, pros, cons, and more.
Table of Contents
What does it mean to refinance a car loan?
Refinancing a car loan refers to switching out of an existing car loan with another car loan, typically from a different financial institution. The main purpose of refinancing a car loan is to gain better repayment terms with regard to interest rates, EMIs, duration of loan repayment, and so on. As a result, you can decrease the monthly payments and free up cash for other financial obligations.
Refinance car loan is also known as a car loan top-up. But what are the reasons you can get refinancing on your car loan? Let’s explore.
When should you refinance a car loan?
- Lower interest rates
Suppose another bank/NBFC is offering a loan option at a lower interest rate. In that case, you may want to consider switching over to the new option so as to reduce the overall payable interest amount. But in order to get the new loan, you need to pay off your current loan. Further, you should make sure that the prepayment penalty charged for your old loan is lower than the new benefits you will receive with refinancing.
- Increase in credit score
If your credit score has improved since the time you took the loan, there is a chance that you will be charged a lower interest rate or at least have better repayment terms in general.
- Change in income
If there is a change in your monthly income, you may want to refinance your loan in such a way that the EMI payments align with your income. For instance, if your income has increased from Rs. 1 lakh to Rs. 1.5 lakh, you may want to increase your EMI payment proportionally so as to be able to pay off the loan faster. In this case, refinancing can be considered.
- Loan duration
Auto loan refinancing allows you to change your loan duration, either making it longer or shorter. This can help lower your monthly payments. However, it is important to note that changing the duration may affect the total amount you pay, including interest.
- Modify the co-signer agreement
By refinancing your car loan, you get an option to add/remove a co-signer. If your current co-signer no longer wants to be responsible for your loan repayment, you can remove their obligation by refinancing a new loan from a different lender.
- Change in terms
When you initially applied for your current loan, you may not have been completely satisfied with the terms offered. However, you might have accepted it because it was slightly better than other options. But in case you come across a more desirable auto loan with improved terms regarding late fees, insurance, application charges, and other factors, you can choose to refinance and enjoy these better features.
When not to refinance a car loan?
Given this, it is also important to note the situations where you should not refinance your car loan. They are as follows:
- When most of the loan has been paid off, refinancing a loan when you are close to fully paying it off does not make sense because your payable interest does not reduce considerably; besides, you have to pay refinancing fees. Your costs may exceed your benefits.
- Refinancing may negatively affect your credit score. Hence, if you plan to apply for a new loan or credit card, it is best not to refinance your car loan.
Eligibility criteria to refinance a car loan
Though the final eligibility depends on the overall profile and creditworthiness of the individual, here are some basic eligibility guidelines for salaried employees and self-employed individuals.
For salaried employees:
- Individuals who are a minimum of 21 yrs of age at the time of applying for the loan and no older than 60 at the end of the loan tenure.
- Individuals who have had a job for at least 2 yrs, with a minimum of 1 yr with the current employer.
- Those who earn a minimum of Rs. 2,50,000 per year, including the income of the spouse.
For self-employed individuals:
- Individuals who are a minimum of 25 yrs of age at the time of applying for the loan and no older than 60 at the end of the loan tenure.
- Individuals who have been in business for a minimum of 2 yrs.
- Those who earn a minimum of Rs. 2,50,000 per year.
Documents required to refinance car loan
Below-listed documents are required to refinance a car loan:
| Photo Identity Proof | Voter ID |
| Passport | |
| Aadhaar Card | |
| Driving License | |
| Age Proof | Voter ID |
| Passport | |
| Driving License | |
| Aadhaar Card | |
| Birth Certificate | |
| Secondary School Leaving Certificate | |
| Pension Payment Order or Receipt | |
| LIC Policy | |
| Address Proof | Rent Agreement |
| Bank Statement | |
| Ration card | |
| Passport | |
| Driving License | |
| Electricity Bill | |
| Property Tax Receipt | |
| Water Bill | |
| Telephone Bill | |
| Credit Card Bill | |
| Income Proof | 3 Months Salary Statement |
| 6 Months Bank Statement | |
| Income Tax | Form 16 |
| Employment Proof | Employers Letter |
| Identification Card | |
| Valuation / Cost Estimation Report from Evaluator Approved by the NBFC or Bank | |
| Car Ownership Papers |
Note that in the case of self-employed individuals, six months’ bank statements can be used as income proof.
Pros of refinancing a car loan
The following are the advantages of refinancing a car loan:
Lower payable interest in the long term
As mentioned above, you might be able to pay lower interest if there is a fall in the interest rate or if there is a change in your credit score. Similarly, if you change the repayment terms in such a way that you are paying higher EMIs, the interest paid goes down then too. All of this is possible through refinancing.
Favourable loan terms
You may have settled with your earlier loan due to a need for more options. However, with refinancing, you will be able to change a number of things like loan tenure, co-signer details, terms related to late fees, insurance, application charges, hypothecation, and so on.
Reduced monthly payments
With the help of refinancing your car loan, you can lower your monthly payments, making it more manageable for your budget.
Improved cash flow
With lower monthly payments, you have more disposable income, which can be used for other financial goals or expenses.
Better loan terms
Refinancing gives you an opportunity to negotiate better loan terms, such as reduced fees, flexible repayment options, or improved customer service.
Removal or addition of co-signer
Refinancing allows you to remove a co-signer from your loan if they no longer wish to be responsible for repayment. Conversely, you can also add a co-signer to strengthen your loan application and potentially secure better terms.
Cons of refinancing a car loan
Following are some of the demerits of refinancing a car loan.
Difficulty in refinancing loans for an old car
If your car is relatively older, its value must have depreciated considerably. For such cars, it is hard to find entities that are willing to refinance. Different lenders have different terms, so shopping around before finalising a lender is a good idea.
High charges
In order to refinance your loan, you will have to pay a penalty of about 1-3% to your initial lender. Apart from this, there are a number of other fees like processing fees, refinancing fees, and so on. Some institutions may not be transparent about these charges. So, it is your responsibility to make sure that you negotiate these fees and find a good deal. Great care must be taken so that your costs do not exceed your benefits during the process of refinancing.
Affect on credit score
Refinancing a loan affects your credit score negatively. It involves applying for a new loan, which can temporarily lower your credit score due to the credit inquiry. If you are going to take a loan or credit card in the near future, refinancing may negatively impact the terms of payment of your new loan. However, consistently making timely payments on the new loan can help improve your credit score over time.
Longer loan term
Extending the loan tenure through refinancing may result in paying more interest over time, even with lower monthly payments. It can increase the chances that your car will depreciate below what you currently owe.
Eligibility requirements
To qualify for refinancing, you need to meet the lender’s eligibility criteria, which may include a good credit score, income verification, and other financial factors. Failing to meet these requirements could result in not being approved for refinancing.
Limited savings potential
Depending on the difference in interest rates and the remaining loan term, the potential savings from refinancing may not be significant enough to justify the associated costs and efforts.
How to refinance your car loan?
Once you have ensured that you satisfy all the eligibility requirements and have the necessary documents for the process of refinancing, you can apply for an auto-refinance loan with an institution of your choice. Further, making sure you do not have any defaults with the previous lender is a step that you shouldn’t miss.
However, caution must be exercised while choosing a refinancer. There are many options available in the market. So, conduct proper research before you arrive at a decision. Also, make sure to negotiate the fees and other details in your favour. A lower interest rate is one of many metrics you should be looking for. Ensure that the refinancer is trustworthy and that you do not end up incurring more losses than the benefits you gain from the refinancing.
Conclusion
Owning a car is the dream of every man. Loans are an excellent option for the same. However, a lot of factors and numbers come into play when availing of a car loan. You can opt for refinancing your car loan if the current terms and conditions do not satisfy you. Refinancing allows you to alter payment tenure and interest rates, provided you negotiate the deal in your favour. There are several options available in the market for refinancing. Be sure to properly research and examine your options and choose the best one for you.
FAQs
How long until you can refinance a car loan?
How many times can you refinance a car loan?
As an insatiable reader and learner, I’ve spent the last two years exploring the world of finance. With my creative mind and curious spirit, I love making complex finance topics easy and fun for everyone to understand. Join me on my journey as we navigate the world of finance together!
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