Is there anything we do that doesn’t involve a loan these days? Even shopping at Sheng Siong with a credit card is a kind of loan, isn’t it? But then, some loans are greater than the others, because of the large quantum. This includes home loans (the greatest of them all) and car loans. Even if you’re buying a simple Toyota, you might take a loan of around S$60,000. The usual car loan interest rate in Singapore ranges from 2.5% to 3.5%. So if someone offered to take over your current loan at a lower interest rate, wouldn’t it be great?
What is car loan refinancing?
Car loan refinancing is a loan product wherein another bank takes over your ongoing loan from one bank, while offering you a lower interest rate. For example, you may have a DBS car loan where you’re paying 2.78%. You find out that Citibank is offering car loan refinancing at 2.39%. If you decide to go for the Citibank offer, Citibank is essentially buying out your car loan from DBS and giving you a better rate in the bargain.
Now you might ask – “If I am getting a lower interest rate, why would I think that car loan refinancing is NOT a good idea, lah?” Fair enough. However, you should know the nitty-gritties of car loan refinancing to decide whether the option is good for you or not.
What are the terms of car loan refinancing?
Some of the things you need to consider before going for a refinancing loan are:
- Many banks may have a minimum loan amount they would like to refinance. For instance, a bank may say that they will not refinance loans less than S$100,000.
- There are many private moneylenders and financial institutions that offer car loan refinancing. But their terms may be more stringent than loans offered by banks. So read the refinance conditions and terms carefully before committing to anything.
- You may have to pay a fixed early settlement amount to your current bank for refinancing.
- It is possible that your new bank may not refinance 100% of the loan amount due. But many banks do offer 100% refinancing, so check your options before you choose a refinancer.
- Check the interest rates and effective annual interest rates carefully. It is possible that the interest rates have actually risen and your refinancing may be costlier than it is now.
- Your repayment period goes down depending on how long you’ve had the original loan. For example, if you got your car loan for 5 years from OCBC Bank in September 2016, and plan to refinance it in April 2017, your refinanced loan tenure cannot be more than 4.5 years.
When is car loan refinancing good for you?
To finally get to the point of this article, under what circumstances is car loan refinancing a viable option? Here’s when:
- The MAS last year relaxed its motor financing rules and the tenure of car loans have been extended from 5 years to 7 years. If a longer tenure is better suitable for your current financial needs, refinancing is a viable option for you.
- If you’ve recently been promoted or offered a better job with a higher monthly income, you can use this new income to bargain a better interest rate on your existing loan. You can approach your own bank first and request for a revision on your interest rate structure, or you can even consider refinancing with a different bank.
- On the contrary, if you’ve recently lost your job, taken a pay cut that has lowered your monthly income, your repayments will start looking heavy. At this point, refinancing to a lower interest car loan is a good option.
- If your current bank is not giving you an option to make early repayments free of additional charges, and the full or partial settlement fee is high, you should look for a refinance option that gives you fee-free pre-payment option.
If your circumstances match any of the conditions given above, do not hesitate to go for a car loan refinance. Remember that your objective in a refinancing should be to save money not only on monthly installments but also on the overall borrowing.