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What is a car loan?
Cars are becoming increasingly expensive. While we would all like to have the disposable income available to purchase a car outright, the reality is that this is not a luxury available to everyone. Therefore, alternative finance options must be considered.
One option may be to use your bank to obtain a loan to utilize for the purpose of purchasing a car. This may be achievable via your current account or as an extra service. However, the option that has become the most common is to purchase a specific car finance loan from a company that specializes in such deals.
Most major car retailers provide flexible finance options at the time of purchase. Such finance agreements can be requested at the time of purchase and generally cover the cost of the car plus interest.
What is refinancing?
At times, the rate originally received for a loan may not be the best available should interest rates fall substantially. For example, an initial rate of 12% interest may last for a 5-year term. The national CPI (consumer pricing index), the interest rate that is used to calculate the amount banks should be charging those borrowing funds, may fall during the 5-year term.
In essence, the rate originally undertaken may no longer represent value for money. Therefore, it may be pertinent to look at options to address the disparity between the rate currently paid and the new rate available.
The way many individuals choose to proceed in this case is to wrap their original loan into a new loan agreement. Basically, a new finance agreement is undertaken to consume the original amount. For more information, please visit https://besterefinansiering.no/refinansiering-av-billån/
Can I get a new car when refinancing?
Depending on your personal circumstances, it may be possible to refinance your current car loan in order to purchase a new vehicle. A common method is to look to trade in your current vehicle and purchase a new one at the same time. If you have a finance agreement that has an obligation to pay a certain outstanding balance amount, you may therefore need to refinance your original loan amount in order to complete the new transaction.
Ordinarily, this occurs when negative equity remains on the original vehicle. As part of your original car finance agreement, you have a responsibility to ensure any negative equity is taken into account when trading your vehicle for a new one. It is not possible to sell a car when an existing outstanding finance balance remains on the vehicle.
What type of car can I get if I refinance my current loan agreement?
In short, the possibilities are almost endless. A lender will assess your current financial obligations, negative equity, or positive balance on your current vehicle and assess what they would need to charge for the new vehicle.
For example, if you sold a car worth £16,000 with a negative equity of £3,000 and purchased a new vehicle worth £21,000, the new provider would include the £3,000 in the pricing calculation for the new vehicle before adding any interest.
Your affordability will then be assessed against the value of the new purchase to ascertain if you can go ahead with the refinancing of the original agreement. Ultimately, you may be able to purchase a larger or more expensive vehicle up to the amount you are considered to be able to afford by the lender. Your new lender would then settle your current car loan finance agreement while opening a new one for you.
When should I look to refinance my car loan?
There are many different times when it may be appropriate to look at refinancing your car loan. Changes in interest rates, personal circumstances, and improved credit ratings are but a few reasons.
When the time comes to purchase a new vehicle, negative equity (money owed against the original loan terms) may also exist, so refinancing this amount of the original car loan may also be required. In short, there could be many overarching reasons for looking to refinance a car loan, but your personal circumstances will best indicate if it is the right time for you.
It is becoming increasingly common to refinance car loan agreements as interest rates fluctuate. However, you should be aware that this may impact your credit score and increase the length of time required to complete repayments.
How does it work?
Ultimately, refinancing a car loan is the method of undertaking a new loan agreement to replace an existing loan agreement. This could be with your existing lender or through a new lender. It is important to review all lenders available to you before proceeding with any car loan refinancing agreements.
You may find that your existing lender can give you an attractive deal, but you may also find a better deal through a new lender. You should be careful to understand the terms and conditions of your current car loan finance agreement before proceeding with any new agreement. There may be fees involved with the termination or transfer of your existing car loan agreement, be it internally within your existing provider or with a new provider.
What are the options?
The options available to you depend entirely on the lender you currently have your car loan agreement with and any future lender you may choose to use. Car loans can be bundled into mortgage agreements in order to consolidate payments, settled through the purchase of another loan agreement to cover the original amount, or even settled by bundling into other loan types.
There are multiple options available in this space, and you should begin by speaking with your current lender to understand them all. You should then look at alternative lenders to fully understand what is available to you. You can then review the best option available to you.
Who is eligible to refinance a car loan?
This question has a number of variable factors, primarily based on credit score, outgoing and incoming for the individual. The criteria will always come back to affordability. Can the individual afford the new repayment amount without increasing their financial risks? If the answer is yes (based on defined factors calculated by the lender or underwriter), then the basic answer is yes the said individual could be eligible to refinance their car loan.
However, multiple other factors, including the terms and conditions of the original car loan agreement, also play a role. Many lenders offer a fixed-term agreement that may or may not contain a break clause with or without a financial penalty. Your eligibility to refinance a car loan is, therefore, based on circumstances related to your current agreement, borrowing power, and future financial risk.
Where can I get advice?
There are many different options available to gain advice when looking at refinancing your car loan agreement. The website https://besterefinansiering.no/refinansiering-av-billan/ provides some tips and information on how car loan refinancing works. There are also many other websites and resources available online. It is important to ensure that the source of the information is trustworthy, accurate, and impartial.
You may also be able to seek the advice of a financial advisor should you have access to one. Again, this should be a reputable, qualified individual, and the final decision on whether or not to take out a car loan refinance agreement should always be your own. You should only proceed if you are sure it is the right option and method for you to undertake.
Are there any downsides?
Truthfully, yes. Generally, when choosing to refinance a car loan, there are fees to pay to exit the original agreement. There may also be fees to pay to the new provider, such as administrative costs and new loan charges. As well as this, your credit score can be impacted when applying for new financial agreements.
There are also risks around reducing your borrowing capacity, and unless a product is carefully selected from a reputable lender, there could be hidden costs and consequences.
On top of this, interest rates advertised are usually a ‘best case’ scenario meaning your actual rate of interest may vary from the ‘attractive’ rate you see advertised. It is absolutely crucial to consider all of your options, implications, and circumstances before refinancing any loan agreement.
What are the next steps?
The first thing you should do before refinancing a car loan agreement is to understand the terms and conditions of your current car loan agreement. You should read your contractual documentation carefully and, if in doubt, contact your current provider to ask questions about the terms of your agreement.
You should clarify whether there is a break clause or even a break penalty and understand the options available to you through your current lender.
Once you have understood the terms of your current car loan finance agreement, you should shop around to ascertain the best deal, both in terms of terms and conditions and financial implications.
Should you find the right deal, you should then ensure that you proceed with caution, balancing your current financial obligations with any new financial obligations that result from refinancing your car loan.
David Prior
David Prior is the editor of Today News, responsible for the overall editorial strategy. He is an NCTJ-qualified journalist with over 20 years’ experience, and is also editor of the award-winning hyperlocal news title Altrincham Today. His LinkedIn profile is here.
