Last Updated on Mar 8, 2022 by Anshiya Tabassum

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. Read on to find out more about it.

This article covers:

What does it mean to refinance a car loan?

Refinancing a car loan refers to switching out an existing car loan with another car loan, typically from a different lender. 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. 

When should you refinance a car loan?

You should consider refinancing a car loan in the following situations:

Lower interest rates

If another bank/NBFC is offering a loan option at a lower interest rate, you may want to consider switching over to the new option so as to reduce the overall payable interest amount.

Credit score

If your credit score has improved since the time you have taken the loan, there is a chance that you will be charged a lower interest rate or at least have better repayment terms in general.


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.

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.

Pros of refinancing a car loan

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.

Changes in loan terms 

You may have settled with your earlier loan due to a lack of 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. 

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.

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 on 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. 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.

Eligibility conditions and documents necessary to refinance a car loan

To be eligible for a car loan refinancing, you must meet the following requirements:

  • No default on repayments with your initial lender. 
  • The car should have some value. The car is the collateral in car loans. So, if your car has depreciated considerably, it will be hard to find a refinancer.
  • Refinancers give preference to those individuals whose credit scores have increased from what it was at the time of taking the initial loan. 

Documents required to refinance car loan

The documents required to refinance your car loan are:

  1. Proof of identity and address proof
  2. Bank statements showing that you have made regular payments towards your initial car loan. Records for the previous 6-12 mth are deemed sufficient.
  3. Car insurance proof
  4. Documents containing details of the existing loan like loan tenure, EMI value, interest rate, and so on.
  5. Documents containing information about your car like the make, model, year of purchase, and so on. This helps the refinancer to arrive at the present value of your car.

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. Also, make sure you do not have any defaults with the previous lender.

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 favor. A lower interest rate is not the only metric 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.


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 favor. 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. 

Aradhana Gotur
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