There are many factors and benefits which may propel you to consider refinancing your car loan.
You could be doing it to consolidate all your car debts, or to lengthen your loan period in order to ease your cash flow.
Whatever your reasons may be, here are a few things you’d want to consider if car loan refinancing is in your agenda this year.
1) You’ll need time and effort to get the best package
For many people, one of the key reasons in taking up a refinancing deal is usually to take advantage of better interest rates. If your existing car loan or hire purchase package was taken during a time when the rates were very high, you could potentially be paying less interest on your car loan by shifting to a more competitive refinancing package.
However, the reality is that new car rates are generally more attractive than interest rates for used cars, so finding a refinancing deal that’s way better than your existing car loan is easier said than done (though theoretically not impossible).
Additionally, because rates for car loans vary from models to models and banks to banks (much more so than home loan), the act of shopping around and comparing interest rates for car refinancing deals could potentially be very time-consuming and tedious. To get the best deal, make sure you’re well prepared to spend the time needed to make it happen.
2) You’ll want to review your current loan documents
Like any other refinancing endeavours, it is important that you review the documentations for your current car loan. You’ll want to make sure that there isn’t any prepayment penalty (i.e. refinancing a loan is technically prepaying for it); and if there is, you’ll want to ascertain the penalty amount and the period to which the prepayment penalty applies.
Say your prepayment penalty is 2% and the penalty period is 3 years, taking a refinancing package before the 3-year period would see you instantly coughing up an additional RM1,000 for a RM50,000 loan!
3) You’ll want to make sure you understand the clauses of your refinancing deal
As of all formal agreements, you’ll want to go through all the fine prints stated in the documentations when you take up a refinancing deal. This is imperative because there may be hidden charges, unfavourable terms and other unforeseen clauses to cause a headache for you in the long run – such as a repayment penalty your refinancing officer may not have told you about.
Additionally, you’ll want to understand the Margin of Financing for your new package. Some refinancing packages extend solely to take over 100% of your existing loan, whilst other packages provide loan PLUS cash out of up to 90% of the current market value of your car.
To put it simply, taking a refinancing deal isn’t just a simple matter of signing on a form. It involves both time and effort – which you’ll need plenty of to understand your refinancing agreement from scratch.
4) You’ll need to know what you’re getting yourself into from a financial standpoint
One of the most common reasons to refinance a car loan is to free up more cash every month by extending the loan period. From a financial standpoint, that means getting yourself in debt for your car for that much longer, which inadvertently means you’ll be paying more interest regardless of the rate of your refinancing deal.
Though it is always nice to have extra cash every month, you may want to ask yourself if the extra money is necessary (eg. for your child’s education) or if it is simply for indulgence purposes (eg. for fine-dining every weekend). After all, you really shouldn’t be extending the time you’ll be debt if you can help it. If anything else, you should be actively thinking of ways to shorten it!
