Vikas purchased the car of his dreams a few years back. He took a car loan from one of the leading banks at the time of the purchase. The rate of interest offered was slightly higher, but Vikas went ahead and took the loan to purchase the car.
But a few days ago, Vikas came across an advertisement from another bank offering the option to refinance car loan. Vikas got curious and wanted to know more about this. He approached his friend Sudhir, who works in a bank. Sudhir told him to replace the existing car loan with a new loan. This process is called car loan refinancing. The new loan is availed from a new lender and usually offers more favourable payment terms.
When can you refinance your car loan?
For most people considering refinancing car loan, the first question is: when should you refinance your car loan? The answer is simple: there is no right time for refinancing your car loan. Once you meet the eligibility criteria to obtain a new car loan and get better commercial terms on the loan, you can immediately go for refinancing the car loan.
Refinancing your car loan is also beneficial in such cases where the terms of the original loan are not too favourable, but you can sign on to make the purchase. With refinancing the loan, you stand a chance to receive better terms, especially concerning the rate of interest, tenure of repayment and processing fees etc.
Many people choose to refinance their car loans to modify the tenure of the loan. When the loan tenure increases, you get an option to repay the loan over a longer period. If the objective is to reduce the loan tenure, you will be required to pay increased EMIs over a short duration. So it is advisable to factor in the objective of refinancing before you decide to refinance the car loan.
Is refinancing possible within the same bank?
Typically, it would be unusual for a person to seek refinancing from the same bank which had provided the original loan. The Reserve Bank of India also frowns upon banks who overlook existing debts by offering new loans. That said, it is not impossible to refinance a loan from the same bank.
Most banks these days sell auto loans to third-party investors and earn a fee on the same. The original lender may be keen on refinancing the car loan on better terms and conditions. If the borrower meets the specified eligibility conditions, the existing lender can offer a top-up loan with better commercials. In case of auto loans, banks/NBFCs do not allow a switch to a loan offering a lower rate within the same bank/NBFCs.
A typical refinance consists of transferring the car loan to other financiers. This is called balance transfer. The switchover is done to a lender who is offering a lower rate of interest. The next component of refinancing is transferring the existing loan amount along with some additional top-up amount.
Benefits of refinancing your car loan
A decision to refinancing your car loan depends on a variety of factors. You should weigh in each of these factors before you decide to refinance the loan. Refinancing the car loan can be useful under these circumstances:
Interest rates have lowered: Due to the fluctuations in the economy, it is possible that you come across a car loan with a significantly lower rate of interest compared to the rate of interest currently paid by you. In order to reap the benefits of a lower rate of interest, you can choose to refinance the loan.
Credit score has improved: Each loan application depends on the credit score of the individual and goes a long way in deciding the terms and conditions of the loan. It is possible that your credit score has significantly improved since you took on the car loan. In such cases, refinancing the car loan would offer you access to better terms and conditions.
Changing the tenure of the loan: Due to a change of circumstance, it is possible that you want to change the amortisation of the loan due. Refinancing of a car loan is helpful in such cases as you can increase or decrease the tenure according to your needs.
You can also consider refinancing car loan as an option when you want to add or eliminate a co-borrower of the loan.
When should you avoid refinancing?
Technically speaking, refinancing is a new loan application process. Accordingly, you will be required to pay the application charges, processing fees, etc.for obtaining a refinanced loan. If you are unable to negotiate a waiver of these charges with the new lender or a reduction in the charges, it may not be a good idea to go ahead with refinancing.
Closing the existing loan would also mean payment of foreclosure charges. Typically, the penalty ranges between 1 percent to 3 percent, depending on the lender. You would have to carefully assess the gains you make due to the better terms of the new loan v. the prepayment penalty amounts that you would have to pay.
When you decide to refinance the car loan after owning the car for several years, it may be difficult to find a financier. The reason is the depreciation in the value of the car over the years. Usually, lenders are not keen to refinance old cars.
Don’t be lured into the trap of lower interest offered by the new lender. Do your diligence and find out about the reliability of the lender. Read online reviews about the loan application process
Eligibility for refinancing
There seem to be no minimum eligibility criteria to obtain refinancing of a car loan. However, as per the market practice, a new lender will take into account the following factors while deciding on your loan refinancing application:
- You have not defaulted on payments on the present loan: No one wants to extend a loan to someone who has been defaulting on payments. So if you are currently behind your EMI payments with your existing lender, the chances are that you will not be in a position to find a bank that would refinance the loan.
- The car should be worth something: Lenders will usually inspect the condition of the car before they decide to extend the refinanced credit. The age and mileage offered by your car are factors that would be taken into account.
- Credit score: Your credit score is an indicator of your financial health. Like any loan application, the success of an application for refinancing of car loan would also depend on how good your credit score is. Lenders would typically expect to see an improved credit score compared to the score you had when the original loan was extended.
Documents required to avail a car refinance loan
The bank you are approaching for a refinanced loan will require a standard set of documents for processing the application. Set out below are a list of documents typically required by each bank. Please note that this is only an indicative list and the requirements of documents may vary from bank to bank.
- Identity and address proof: You will be required to provide an identity proof such as PAN card or Aadhar card or your passport. You will also be required to furnish address proof.
- Bank account statement: The lenders will also want to know your ability to repay a loan and accordingly the account statement for the last six months/12 months will have to be furnished.
- Proof of car insurance: The lender would also want to see the necessary documentation obtained for insuring your vehicle.
- Details of the existing loan: The new lender will need the information on the current outstanding balance of the loan and the terms and conditions of the existing loan.
- Information of your car: You will have to provide the details of your car such as model number, year of make, current mileage, past accidents etc.
Steps to refinance your car loan
The first step to refinance your car loan is to make a thorough assessment of the interest rates being offered by the new lenders and consider the terms and conditions of the loan. This will help you decide which bank you are planning to approach for obtaining the refinanced loan.
Speak to your present lender about refinancing to understand the foreclosure process and the charges to be paid. This would be a good opportunity to negotiate the waiver of the charges. You can also request the lender to provide you with the outstanding balance of your loan.
The next step is to get the entire paperwork ready at your end: collect and file the important documents that will be required and check with the bank if any additional documents will be required. This will save you a lot of last minute hassle. Make sure that your insurance policy is up to date and all of the premiums have been made. The new lender is going to ask you for a copy of the policy and last premium paid.
Approach the new lender with a request to obtain refinancing for your car loan. Try to negotiate the best rate of interest and other terms and conditions.
FAQS
What is the objective of refinance of car loans?
Refinancing helps to lower the EMI payments if you can get a better rate of interest than your present loan. Finding the lowest terms possible for a car loan is the real object of refinancing the loan.
I have refinanced my home loan. Can I still go ahead and refinance my car loan?
Yes, a refinanced home loan is not an impediment to refinance car loan.
Can I approach my existing lender for refinancing the car loan?
Existing lenders only provide a top-up loan with additional terms and conditions. You would have to seek a new lender for refinancing the loan.
Does my credit score have any role to play in getting better terms for my refinanced loan?
Yes, a good credit score definitely improves the chances of getting a better rate of interest and terms and conditions.
Will the refinanced loan be offered at a fixed or floating rate of interest?
It depends on the lender. NBFCs offer both fixed and floating rates of interest.
Will the age of the car determine the ability to refinance my car loan?
Yes, the lender will have a minimum set of standards the vehicle must comply with. Age is one of the factors which will be taken into account to determine whether refinancing your car loan is commercially viable for the lender.
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