Refinancing your ride means taking out a new loan for the balance of payments remaining on the car to make the monthly instalments more palatable.
“[For example], if you bought a 2008 double cab that cost you R200,000, your monthly instalment would be R4,650 over 72 months at a 16% interest rate,” said Lebogang Gaoaketse, head of marketing and communication at WesBank.
“Refinancing it over the same term at 12% interest would reduce the monthly instalment to R2,950, benefiting your monthly budget with a saving of R1,700.”
Many owners may look at refinancing as an attractive alternative to selling the vehicle and taking out an entirely new contract to buy another one, 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,” said Gaoaketse.
Advantages of refinancing
Gaoaketse highlights a few advantages of refinancing your vehicle:
- Improved cash flow – Refinancing might enable you to access more cash if you owe less than the car’s current value
- Lower monthly payment – Lower monthly payments could assist those who are struggling to cover their monthly costs
- Better loan terms – Refinancing allows you to adjust the loan terms, including the length or the type of interest rate (fixed or linked)
- Lower interest rate – If you qualify for a lower interest rate while refinancing, you will save money by paying lower instalments for the remainder of the contract
If you are seriously considering refinancing your vehicle, there are factors to consider to ensure it is the right time to do so.
When interest rates drop, there is a possibility that they will go lower than when you initially financed the car, offering an attractive opportunity to restructure the deal if your repayments are determined by a linked rate.
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,” said Gaoaketse.
Drawbacks of refinancing
There are disadvantages to refinancing to be aware of, however.
This includes:
- Negative equity – If you owe more than the vehicle is worth, refinancing may not be an option or may not result in any significant savings
- Longer loan term – If the loan term is extended, you may end up paying more interest over the term of the loan even if you have a lower interest rate
- Additional fees – Refinancing often involves fees, such as loan application fees or prepayment penalties, which add up and reduce the potential 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
Whether the pros outweigh the cons comes down to your unique circumstances as there’s no one-size-fits-all solution to structuring a 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,” said Gaoaketse.
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