Are you ready to refinance?

10 January 2017

Are you ready to refinance?

time to refinance your car loan

Is your car loan giving you the flexibility you require? It’s not uncommon for your needs to change. If that’s the case it might be time to change your car loan too. Look out for these easy to spot signs your car loan is under-performing and needs to go.

How’s your budget?

Setting up a budget for a car loan often requires some estimates about ongoing costs and future income. When the numbers come in you may find you have more money to play with than you initially expected. That should be good news: more money means you can increase the value of your repayments and pay off your loan sooner.

There are different ways you can increase your repayments. All of them speed up the rate at which your loan is cleared. If the increase in your funds is ongoing you might add to each individual repayment. Always check first you don’t have another debt with a higher interest rate - it’s always important to pay off the loan which is costing you more first.

If you find your additional income is less ongoing but still fairly regular - perhaps bi-annual or annual - you could make lump sum payments to match. Lump sum payments are one offs so there is no commitment to make the payment unless you have access to the funds and want to.

Making additional payments cuts straight into the principle of your loan, which means reducing the core amount of money you owe your provider. The result is you will pay off your loan faster than originally planned, and your interest costs will reduce too. It really is a win-win situation.

Unfortunately your loan provider may not agree. You may not have considered repayment flexibility when you set up your loan and could now find you are restricted by terms and conditions that penalise you for paying more than scheduled payments.

The solution? Time to refinance. Ask your provider for the settlement balance and understand any early repayment fees. Move your loan to a provider who is able to support your requirements. If you were considering repaying a lump sum you can take this off the balance and refinance for a lower amount.

What’s happened to your credit record?

You may have found when you set up your car loan your credit record was not at its best. This might be because of previous challenges with loan repayment or meeting the terms of a financial agreement. Or perhaps you had never borrowed before, so your provider couldn’t understand your likely ability to repay your car loan.

All financial providers use your credit record to assess their willingness to lend you money. Your credit record scores your historic performance managing debt and financial agreements. If you struggled to make a payment and were 30 days or more in arrears, the chances are your credit score was impacted.

Poor credit scores usually result in higher interest rates, and your car loan may be structured around an interest rate that is above the market average. The good news is, , if you have been meeting the terms of your loan, your credit score may have improved. Proving your ability to manage your commitment can have a positive impact and your options may have changed.

High interest rates can cost you a considerable amount in the long term. Check first with your existing provider and find out if your interest rate could be reduced.

You may find other loan providers that were not willing to lend to you before are more open to your application if you have a track record of repayment. Either way you should be able to refinance your loan and reduce your interest rate.

Are your costs too high?

Car loans can involve a variety of fees and charges, including the interest rate you pay on the money you’ve borrowed. You may not have been aware of the full cost of these fees when you set up your loan, but now you’re a little further down the track you may be ready for change.

Refinancing can be a good solution if you want to negotiate a lower interest rate or set up a car loan that doesn’t have the same fee structure. It’s important to start the process by being clear what costs you currently incur so you can be sure you don’t sign up to another car loan with the same fees.

Always be mindful of the cost of changing provider. It’s important to request a settlement balance and understand any penalty fees for changing loan or provider before you begin the refinancing process.

The aim of early repayment fees is to protect your provider from any loss of income caused by you removing your loan. This could mean any saving you make might be cancelled out by the early repayment fee.

Car loans are often long term finance agreements. The cost of interest over the life of a loan can be brought down by adopting some smart repayment strategies, but it’s important your provider is flexible to the change.

Refinancing can be a smart move if you feel you’re paying too much in interest rates or charges, or you want to increase your repayments. Talking to your existing provider is a good starting point to understanding the potential to make savings or the need to move your car loan.

Try out our car loan calculator to estimate your repayments should you choose to switch your car loan the AA Finance.

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Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure the content is correct, the information provided is subject to continuous change. Please use your discretion and seek independent guidance before making any decisions based on the information provided in this article.

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