Financially savvy people tend to refinance their car loans. It helps them save on short- and long-term expenses, from getting stuck in paying for a bad deal with subprime rates, or get greater control over their existing loan.
When refinancing car loans, you take a new loan from a new lender to pay off your existing car loan lender. Then, you repay the new lender over time based on the terms of the new loan contract, which ideally should suit your needs much better than the first loan.
What If I Have Bad Credit?
Even if you currently have a bad credit car loan at a very high-interest rate, you can still refinance your car loan. However, you must prove you’re a responsible borrower and significantly improve your “correctible credit.”
A holder with correctable credit refers to a borrower with a previously poor credit history who can improve their situation. For example, they can conduct a bad credit loan after having credit issues on their credit file. For lenders, these could mean they were able to learn from their mistakes and are ready for another chance.
People with correctible credit usually have:
- Made full and on-time loan repayments;
- Improved their income; and
- Paid off other outstanding balances from when they first took out the loan.
Improving correctible credit means you now have a lower borrowing risk than before. Lenders will then open up more options. With lower risk and more offers, you’ll get more negotiating power, allowing you to negotiate a better car loan deal.
What If I Don’t Have Correctible Credit Yet?
If you haven’t improved correctible credit yet, consider taking out an unsecured personal loan. It can pay off the bad credit car loan in full. However, you should have good enough credit to take it out.
Unsecured personal loans usually come with high-interest rates. However, they’re much better than other borrowing options with sub-prime interest rates of 30% per annum or higher.
They’re offered by traditional banks or credit unions. However, they can be quickly accessed from online lenders. For example, an online lender CreditNinja refinance various financial needs, including debt consolidation, mortgage, and car loans, as fast as within the day.
Is It Worth It to Refinance?
Refinancing a car loan isn’t for everyone. It won’t be worth the hassle if you’re not financially struggling since taking out the loan. However, it can be a lifesaver if you’re starting to feel uncomfortable with your car loan repayments and can slightly lower your interest rate by up to 0.25%.
For example, you have an ongoing car loan with an outstanding balance of $30,000 at a 6.49% interest rate and five years left. Overall, you have to make monthly payments of $782 with overall interest repayments of $6,920.
However, if you refinance your car loan and cut your interest rate to 6%, you’ll only have to pay $773 monthly with overall interest repayments of $6,380. You’ll get an $11 difference a month, which can be significantly helpful for your long and short-term expenses.
How to Find the Right Lender?
Start with your current lender. They may refinance their auto loans. If they can and offer you a lower rate, don’t accept it yet. Shop around, compare several lenders, and opt for the one that offers the lowest rate.
If you’re unsure how to find the best deal, here are a few things to inquire about:
- Minimum credit score requirement – Choose a lender who refinances within the range where your current credit score falls.
- Pre-qualification with a soft credit check – Compare pre-qualified refinance loan rate estimates with your current loan with an auto loan refinance calculator. This way, you don’t have to pay anything, you see how much you might save, and your credit score won’t be affected.
- Restrictions on when you can refinance – For bad credit borrowers, many lenders require a waiting period of six months or more, usually after closing your previous loan. It’s an excellent opportunity to show them you can make on-time payments. Conversely, others won’t refinance a car loan without a certain number of months or balance remaining.
- Fees – Most lenders don’t have loan application fees, but others charge $400 to $500 as processing fees, usually after moving forward with a loan. Ensure to check this part and only choose lenders with no or low charges that won’t cut into your savings.
Is it Hard to Refinance A Car Loan in Australia?
In Australia, refinancing a car loan is fairly simple. It involves a similar process to the initial car loan application. Usually, it works like the following stages:
- Borrowers with existing car loans apply for a new car loan of their choosing;
- Once approved, they’ll use that money to pay off their initial car loans with their current lenders;
- Finally, they start making repayments on their new car loans.
Final Thoughts
Car refinancing is all about getting a better deal than your current loan. It should offer a much lower interest rate, more affordable origination or processing fees, and better loan terms that suit your needs. To top it off, it should save you hundreds or even thousands.
