Car loan refinancing

Car loan refinancing is the process of replacing your existing car loan with a new one, usually from a different lender. Refinancing your car loan can help you save money by scoring a lower rate of interest. As a result, you can decrease your monthly payments and free up cash for other financial obligations.

Reasons for car loan refinancing

Car loan refinancing is beneficial to the borrowers in the following instances:

  • For lowering interest rates: If you come across a new refinancing loan with a lower rate of interest during your existing car loan, you can choose the refinancing option. All you need to do is to pay off your current loan and approach the new lender. 
  • Your credit score has improved: You can also consider refinancing if your credit score has improved over time. In such cases, refinancing helps you to become eligible for a loan with better terms at a lower interest rate.
  • For changing the loan tenure: With the help of refinancing, you can increase or decrease the loan tenure according to your needs. This will further help you in reducing the monthly payments. If you extend your tenure, you can repay your loan over a longer time. This will help you in decreasing the loan EMIs. However, you need to remember that you may have to pay a higher amount in total (including your interest) at the end of your tenure. On the other hand, if you refinance your loan to reduce the loan term, you will be able to clear off your loan quickly and decrease the interest amount. But in this case, your EMIs will increase.
  • For making modifications to a co-signer agreement: You can also opt for refinancing your old loan when you want to add or eliminate a co-borrower. If you find that your present co-signer or co-borrower no longer wants to provide a guarantee for your repayment, then you can remove their responsibility by getting a new loan from a different lender.
  • For changing the terms of your auto loan: If you are not satisfied with the loan terms offered by your current lender's then also you can choose refinancing. When you choose this option, you will be able to get a more desirable auto loan with better terms related to late fees, hypothecation, insurance, application charges, etc.

Important points to remember before refinancing your auto loan

Prepayment charges: If you choose to refinance your loan, you will be required to prepay your existing loan along with the penalty charges. So, make sure you go through the prepayment charges and check if they are lower than the benefits that you will gain from refinancing.

Depreciation in the value of your car: When you plan to refinance your old car loan after owning the car for several years, it may be difficult to find a suitable financier. The reason behind this is the depreciation in the value of the car over time. Usually, lenders are not keen to refinance old automobiles if they are very old. Even if they agree, you may not be able to avail of a very good loan deal.

Reliability of the lender: When you think of refinancing your loan, ensure that you choose a trustworthy lender that offers good services. You should avoid finalizing a lender just because they are offering low rate of interest. Before zeroing on any lender, first you need to check their credibility by doing an online research or enquiring among your friends and family.

Additional charges: When you want to apply for refinancing, you will have to apply for a new loan from a new bank. This will require you to pay processing fees and certain other charges. So, you need to assess the additional charges charged by your lender before going for refinancing your old car loan.

When should you avoid refinancing?

  • When you have paid a major part of your current loan: If you wait for too long to refinance your car loan, you may not save much on interest. This is because you would have already paid off a major portion of the interest of your loan at the beginning of the tenure.
  • When refinancing fees exceed the advantages: Before refinancing your car loan, evaluate the fees that you will have to pay for this procedure. In case if you are paying a high prepayment penalty or a high processing fee and it is not worth paying, then you should not opt for refinancing.
  • If you are planning to apply for new credit: If you are planning to apply for new credit, then also you should avoid refinancing your auto loan. This is because refinancing will affect your credit score negatively. As a result, you will face difficulty while applying for any credit products in the future.


Car loan refinancing is a smart move if you are getting a favorable loan terms due to an improvement in your credit score or your financial condition during your current loan tenure. One thing worth noting here is that you will not be able to refinance your existing car loan within the same bank. As refinancing is done by applying for a new loan with a new lender. In case if you want to stick to your old lender, then you will have to opt for a top-up or pre-close your existing loan and apply for a different loan from the same bank.