So you’ve managed to fill out all the forms, hand over all the documents, and fulfill all the criteria to get yourself a car loan.
You’ve picked out your dream car, the keys are yours and you’re finally out on the road. Congratulations! But after a year or so you start to wonder…
Is this the best deal I could be getting?
Car loan refinancing is something that everyone with a car loan thinks about, but often can be too confused or worried about incurring extra costs.
Should I try to get a lower interest rate but add another 12 months to the term? Should I try to increase my monthly payments to pay it off sooner? Will this all end up saving me any money?
We know all of ins and outs of car loan refinance can be daunting, so we’ve put together a little list of some of our best tips to keeping more money in your pocket when it comes to re-negotiating your car loan.
1. You Can Refinance Your Car Loan Anytime
Generally speaking there are no time restrictions on when you can refinance your car loan. In fact, if you really wanted to, you could refinance your car loan before even making your first payment!
Of course, this is probably an unlikely scenario as you have just spent all that time filling out applications and getting approved.
So when should you refinance?
The best time to look at refinancing your car loan is when either your financial circumstances change (for better or worse), your credit score improves, or if you have a variable rate loan, when the Bank of Canada makes a change to the interest rate.
Keep an eye on all of these factors and once something favourable arises, get ready to pounce to save some extra cash.
2. Be Aware Of Any Early Exit Or Prepayment Fees
Pretty much every loan will have some kind of penalty built into it for paying off the loan earlier than the agreed upon term.
This is to cover the lender’s bases and ensure they are still making some money out of the transaction, as they will be losing out on a lot of interest payments if their customer pays off the loan sooner than expected.
Car loan refinancing is essentially paying off the entire balance of your current loan with money lent on the new loan, and so would count as a prepayment or early exit.
Typical early exit fees can range from a few hundred dollars to a few thousand, so be sure to read up on all of your current loan’s rules and fees before making the jump to a new one.
3. Leverage Your Improved Credit Score
If your credit score has improved since you took out your current car loan, it is definitely worth shopping around with other lenders to see what they can offer.
A better credit score shows a potential lender that you are more likely to repay your loan, and thus would be a good customer to have. This makes them more inclined to give you a better rate to entice you over to their services.
Your credit score can improve when you make consistent on time repayments on credit cards, utility bills or other debts. It can also improve after a set amount of time following a credit inquiry, usually several years.
Even a modest improvement in your credit score can make a huge difference when it comes to car loan refinance. Sign up for an online credit score tracking service and you’ll be ready to renegotiate whenever it goes up!
4. Crunch Your Numbers Carefully
The lure of a lower interest rate can be almost too much to resist, but be sure to pay attention to the new length of your loan term.
For example, if your current car loan rate is 8% on a $25,000 loan over 48 months, your monthly repayments would be $610.32. After 12 months, your remaining loan balance is sitting at $19,476.51 and you have paid $1,800.39 in interest.
You then decide to look into car loan refinancing, and you find a new loan that offers you a lower interest rate of 6%, but will add an additional 12 months onto the term of your loan.
You use this new loan to pay out the remaining balance on your existing loan, and your new monthly repayments are now $457.41. It seems like you’ve definitely saved money, as your monthly repayments have gone down over $150!
Not so fast.
With the additional 12 months added to the length of your term, despite the lower interest rate, you will end up paying $2,479 in interest at the end of the 48 months. Combined with the $1,800.39 you had already paid on the original loan, you will have paid a total of $4,279.51 in interest.
If you would have stuck with the original loan, you would have paid a total of $4,295.51. Thus, you have only really saved $16, and this doesn’t take into account the almost guaranteed early exit fees you would have had to pay on the original loan when you refinanced.
Clearly it is important to run your numbers carefully when looking at car loan refinance. You may find that refinancing to get lower monthly repayments at the expense of paying more interest overall is what you need financially to achieve a better cash-flow position.
Deciding to refinance will depend on your personal circumstances, but always make sure you pay attention to the numbers as even just a slight change can make a big difference when stretched out over a couple of years!
5. Be Wary Of Creating An Upside Down Loan
An unfortunate side effect of car loan refinancing can be creating what’s known as an upside down loan.
An upside down loan is where the thing you are paying off, such as a house or in this case a car, is worth less than the amount you owe.
This scenario usually only occurs when you refinance your car and add time to the length of your loan without a commensurate decrease in interest rate.
As cars depreciate the second you drive them off the dealership lot, you will want to try and avoid paying much more than what the car is worth, which is why you definitely do not want an upside down loan.
This point relates to the previous tip and just goes to show that spending the time to crunch your number properly really is the best advice anyone can give you when it comes to car loan refinancing.
6. Don’t Miss Any Repayments During The Refinancing Process
In a perfect world, your new loan would begin just as your old loan was cleared and it would just be a simple matter of paying the new lender the agreed upon monthly amounts.
Unfortunately, things rarely work out that cleanly.
Be very careful about missing any payments on your current loan whilst you wait for your new loan to take effect.
It may be tempting to let the payment date lapse as you hope that your two lenders are communicating with each other, but should you miss the repayment date on your current loan before your new loan has paid off the balance, your credit score might suffer the consequences.
A missed payment on your current loan can even make it harder to refinance with your new loan, as it can appear to lenders that you might have missed that payment because you could not afford it.
Generally, it is better to be safe than sorry when it comes to car loan refinance and to just make your normal repayment on your current loan until you get absolute confirmation from both your lenders that the new loan has gone through successfully.
The worst that can happen in this scenario is that you make an extra payment on your old loan and the lender simply has to refund you. You might be without the cash for a couple of weeks but your credit score will be safe and sound.
7. Know Your Options
None of the above tips will matter much if you don’t even know what your options are to begin with.
Make sure you stay proactive and do your research when looking into car loan refinancing. The more you know, the more you can potentially save and put that money towards more exciting things!
A great source of potential new car loans for anyone looking to refinance can be online loan brokers, such as AutoLoans.ca.
We have established strong relationships with many credit providers, and can negotiate extremely competitive rates when it comes to refinancing car loans.
Simply contact one of our dedicated team members and they will be more than happy to walk you through your options and get you saving money fast!