Is it worth refinancing your car?

Vehicle finance is a long-term commitment. Once you sign on the dotted line, you’ll be locked into a contract for several years. However, it is possible to renegotiate your terms via vehicle refinancing.

We outline what refinancing entails, and we work through a practical example to show how your monthly instalment would potentially be affected.

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What does it mean to refinance your car?

Vehicle financing is a loan that’s granted for the purchase of a specific vehicle. It involves a set interest rate, which is determined in large part by your creditworthiness.

However, over time, you may qualify for better terms. For example, if your income increases or your credit score improves, you could receive a loan at a lower interest rate. This is where refinancing comes in.

Under this option, you would apply for a new loan against your car, and use the funds to replace your current loan. John Duckett, founder of CarInsuranceCheck, believes that refinancing your car is worthwhile and can save you a great deal of money, under certain circumstances.

“If you're currently paying high monthly interest rates, you may be able to find a better deal. This would depend in part on interest rate adjustments and the state of the economy, but refinancing your car may assist you in the long run,” says Duckett.

You could also use refinancing to reduce the repayment period of your loan. If your circumstances have changed and you can qualify for a reduced instalment, you could choose to stick with your current instalment and reduce the term of your loan.

If your circumstances haven’t changed, but you’d like to reduce your monthly instalment, you could also apply for refinancing and opt for a longer repayment period. This will reduce your monthly instalment, even if the interest rate remains the same.

What’s an example of vehicle refinancing?  

It’s useful to consider a real-world example when dealing with vehicle refinancing. This can help put the reality of this decision into context.

Let’s assume you bought a reliable daily drive for R200,000. Your repayment period is 72 months, your monthly instalment is R4,270 and you have an interest rate of 14.5%. To simplify matters, let’s also assume you haven’t put down an initial deposit and you won’t rely on a balloon payment later.

If you refinanced your vehicle and your interest rate dropped to 10%, your monthly instalment would reduce to R3,795. As a result, you would pay R475 less every month. These additional funds can be added to your savings or used to pay your car insurance premiums.

Alternatively, you could continue to pay the previous instalment amount, reduce the term of your loan, and pay less interest overall.

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