Did you finance your vehicle through a bank or car dealership at a high interest rate? Have your circumstances changed, for example your monthly income has increased and your credit score has improved? Then you may qualify for a lower interest rate and can enjoy significant savings on your monthly loan payments if you refinance your vehicle.

Refinancing your vehicle means you can save a great deal of money over the remainder of the repayment period because a lower interest rate means you pay less each month. If you’re not offered a better interest rate on a new loan, there are also benefits to extending the amount of time you have to pay off the car loan.

Here are two options to consider:

• If the amount you owe on your car is lower than the retail value of the car, you can refinance it to get cash out but continue to pay a similar monthly payment.

• If you have settled your car finance loan in full, you can refinance it for its current market value and get the full amount out in cash and then pay an instalment based on a lower interest rate (which is always lower than interest on credit cards or personal loans).

Exactly how much cash you get out of a refinancing deal depends on the market value of the vehicle, the outstanding balance owed on the vehicle and your current credit rating.

Let’s look at this example:

Your car is fully paid up and has a trade value of R100 000. You would receive the full R100 000 in cash. However, if the trade value of the vehicle is R100 000 and you still owe R40 000 to the bank, you will only get out the balance which would be R60 000.

When you refinance your vehicle, you take out a new loan to pay off the balance of your existing car loan. However, the whole purpose is to pay a lower monthly payment and save money by securing a better interest rate.

The majority of people who take out a car loan to buy a care are offered a fixed interest rate and pay a fixed monthly payment over a pre-determined period of time. This is typically 60 months (5 years).

What refinancing involves is coming back to the negotiating table with the bank and negotiating better terms. What you get out of the new deal depends on how much of the current loan is outstanding, your credit rating, your financial standing and the trade value of the vehicle.

People generally refinance their cars when their financial circumstances have changed or when the interest rate improves.

If you applied for car finance at a time when you weren’t in a good financial position or you didn’t have a healthy credit score, the chances are you weren’t offered a favourable interest rate. Once you’ve proven you’re a reliable borrower and your credit score improves, we will assist by applying for a better deal on your behalf.

A drop of 2 or 3 percentage points in the interest rate would be a big saving over a period of time. Why continue with the rate you were offered originally when you could capitalise on that saving?

Let’s look an example:

Your original loan was R380 000 and you were offered a 7% interest rate. The loan period was 60 months.

If you don’t refinance your car and keep things as they are, you will end up paying a total of R453 000 on the loan.

After a year of payments on this loan, your balance will have reduced to R320 000.

If you refinance your car and get a loan for the balance of R320 000 for the remaining 48 months and at a lower interest rate of 5%, you will end up paying a total of R354 000 on your refinance loan.

Combined with the amount of R61 000 you have already paid on your original loan, you will end up paying a total of R415 172 to finance your car to the end of the refinanced loan period.

That’s a saving of about R38 000.

The interest rate a bank offers you is determined by two factors:

• your credit score

• your debt-to-income (DTI) ratio which is calculated by dividing your monthly income by your monthly debt payments

You are entitled to negotiate a better interest rate if your credit score improves and your DTI ratio decreases over the time you are making your current loan payments on your car.

If you weren’t offered the best interest rate on your vehicle loan first time round, it’s worth applying with us for a better interest rate or a longer repayment period.

The latter is particularly true if you were forced to finance your vehicle through a car dealership when you bought it. Car dealerships generally offer a higher interest rate to cover the risk and make money on the deal.

It’s not always possible to negotiate a lower interest rate when you refinance your vehicle but you should be able to negotiate terms on the repayment period. This also helps to reduce your monthly loan payments.

However, a longer repayment period is only really an option if you are battling to cover your monthly expenses each month. Bear in mind, the longer you take to pay off your car loan, the more it will cost you in the long run. This is because you are paying interest on the car loan over a longer period of time.

For real cost savings, the aim of a new loan is to pay it off in the same time frame as the old loan but at a lower interest rate.

Refinancing your vehicle will not save you money if you have already paid off a large portion of your current loan. Banks generally load up the interest at the beginning of the loan period. This means you won’t save much on a new loan if you’ve reduced the balance considerably on the old loan. The longer you wait to refinance your vehicle, the less you’ll save on interest.

Another factor to consider is the age of the vehicle and how much mileage it has on the clock. You’re unlikely to negotiate a better interest deal on an older model with high mileage because the car’s trade value does not make it a worthwhile deal for the bank. Cars depreciate quickly and banks generally only refinance cars that are ‘younger models’.

There is a cost involved to refinancing your vehicle and you need to weigh up the fees against the benefits. There may be a pre-payment penalty charged for paying off your current car loan early. Some banks and car dealerships make you pay all of the interest owed for the negotiated repayment period in addition to the outstanding balance.

Cash-out refinancing is something you’d do if you need a cash injection to cover a financial emergency or an unexpected expense. It involves replacing your current loan with a new one and borrowing extra cash against the value of your vehicle.

Any bank you approach to refinance your vehicle needs certain information and you can speed up the refinancing process by collecting this information and having it on hand before you

You need to provide:

• certified copy of proof of identity
• proof of income (3-months bank statement)
• proof of insurance
• information on your current loan (outstanding balance, interest rate and loan period)
• vehicle details (vehicle identification number/VIN, registration number etc.)