When to Refinance a Car
When you should refinance a car depends on the interest rate and terms of your current car loan. Refinancing a car that has negative equity from your present car loan is another major factor in determining whether you should refinance your car loan. Before drawing any conclusions there are several basic factors that should be considered to determine whether it is the right time to refinance.
If you have a high interest car loan and your credit has improved, then you are probably a perfect candidate to refinance your car loan. If you want to cut your overall interest costs and pay off your car sooner, then you can save a lot of money when you refinance. Saving money on interest is the main reason to refinance a car.
Car Loan Financing in Canada
Over the last 8 years, consumer car loans have increased more than all other forms of household credit, including mortgages. In Canada, more and more consumers are extending the length of their car loans past the traditional 60 month or 5 year term. In car financing, loans with terms of 6 years or more are called an ETL, or Extended Term Loan.
ETL car loans now make up over 60% percent of the car loan portfolios of Canada’s largest lenders. More than 70 percent of new car loans being made now have extended terms. Whether this trend of ETLs will continue remains to be seen. With the statistics above it is clear to see that there are many car financing lenders in Canada who are eager to refinance your car loan.
However, six, seven and eight year car loans significantly increase the overall borrowing costs of a car. In addition, ETLs increase the risk of having negative equity in your car. Negative equity from an existing loan can have a ripple effect when refinancing a car loan.
When you Refinance with Negative Equity
Negative equity in a car loan is when the value of your car is less than the payout of your existing car loan. Having negative equity is also referred to as an upside down car loan. In order to refinance, the lender has to pay out your existing car loan. When you have negative equity the lender is also financing the difference above what the car is actually worth. In effect, the refinance lender is unsecured on part of their loan. The amount of negative equity can influence the rate when you refinance your car loan.
The average amount of negative equity carried by Canadian consumers in upside down car loans is around $6,700. Every year more Canadians are carrying negative equity when they refinance or break their existing car loan.
A car depreciates rapidly over the first two years. The percentage of interest paid with each loan payment is larger during these first two years than it is later in the loan. Negative equity tends to peak in the second year of a car loan.
The Deciding Factor on Whether to Refinance
How much you can save is the deciding factor on whether to refinance. The best refinancing solution will reduce your overall interest costs. This in turn can reduce your monthly payments, or you can pay off your loan sooner.
The best way to find out how much you can save is a quick call to Yes Plan Financial. One of our car loan refinancing experts can provide you with some rough figures on how much we can save you. You can also use our fast application to refinance a car.