To refinance, or not to refinance your vehicle…

This is an option that many car owners grapple with – is it better to refinance their current vehicle, or not? In an effort to de-mystify what this means, and who should consider it as a viable option, it is important to understand what the term means.

In a nutshell, refinancing a vehicle means replacing your current car loan or finance agreement with a new car loan to revise your debt repayment schedule. Applying for another loan to repay your old debt is known as refinancing. As the new loan is usually lower than your existing loan, vehicle refinancing may be a way to save money on your monthly car repayments. This saving can result from obtaining a loan at a lesser amount, extending the repayment period or negotiating a lower interest rate. Some banks and lending houses also offer the option of refinancing a vehicle that is fully paid up, should it qualify.

“It is important to understand what the term encompasses, and when to, or when not to, refinance a vehicle. There is one school of thought that advocates that you should rather consider selling your car before you look at refinancing it. However, it’s not always that simple a decision to make. If the new loan is at a lower interest rate, for example, that could save you some money in the long run,” explains Lebogang Gaoaketse, Head of Marketing and Communication at WesBank.

Refinancing a vehicle is a good option for some people, particularly if it results in lower monthly payments or a lower interest rate. However, it is important to carefully consider the potential advantages and disadvantages, and to do some homework for the best loan terms and interest rates before making a final decision.

Advantages:

• Lower monthly payment: Refinancing can result in lower monthly payments, which could assist those who are struggling to cover their monthly costs or who want to free up a bit of extra cash each month
• Lower interest rate: If you qualify for a lower interest rate by choosing to refinance your car, you will save money by paying less interest over the loan term and by so doing, save on your current monthly instalments
• Better loan terms: Refinancing allows you to adjust the terms of your loan, such as the length of the loan or the type of loan – fixed or variable, for example
• Improve cash flow: Refinancing your vehicle might enable you to access more cash if you owe less than its current value

Disadvantages:

• Additional fees: Refinancing often involves fees, such as loan application fees or prepayment penalties. These fees can add up and reduce the potential savings from refinancing
• Longer loan term: If you extend the length of your loan through refinancing, you may end up paying more interest over the term of the loan, even if you have a lower interest rate
• Negative equity: If you owe more on your vehicle than it is worth, refinancing may not be an option or may not result in any significant savings
• Credit score impact: Applying for a new loan can temporarily lower your credit score; if you are approved for a loan with a higher interest rate, it could hurt your credit score in the long term

Here is an example of how refinancing can benefit you financially:

If you bought a 2008 double cab that cost you R 200,000, your monthly instalment would be R 4,650 over 72 months at a 16% interest rate. Refinancing it over the same term at 12% interest would reduce the monthly instalment to R 2,950, benefiting your monthly budget with a saving of R1,700.

There isn’t a one-size-fits-all solution to structuring a car finance deal. By being honest with yourself and knowing how much you can afford on the vehicle repayment, you are on the best-informed path to paying off the car. As a responsible lender, WesBank will also only provide credit for an amount that you can afford to pay back.

“If you are considering refinancing a vehicle, there are some factors to consider, to ensure it is the right time to do so. One is when interest rates drop, as there is a possibility that rates are lower now than when you had your car financed initially. Current rates are almost half of what they were in 2018, so if you took out a car loan then, refinancing could be an option to save on your loan.

“Another indicator is if your current financial situation has improved. If you are earning a higher monthly salary and able to repay some outstanding debts, your credit score will improve. A stronger financial position could result in more favourable loan terms if you apply for refinancing. At the end of the day, you need to assess your situation and make the most informed financial decision based on that assessment,” concludes Gaoaketse.