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Should you refinance your car loan?

LiveMint logoLiveMint 07-06-2017 Shaikh Zoaib Saleem

If you took a car loan for 5 years at the end of 2014, you would have got it at 10% or more. Now, you can get it for 9.25% or less. So, should you refinance your car loan? We asks the experts

Vyomesh Kapasi managing director, Kotak Mahindra Prime Ltd

Most car loans are offered at a fixed rate of interest. Generally, public sector banks offer at floating rates but most private sector banks and non-banking financial companies (NBFCs) offer at fixed rates. The main reason is that their tenure is not as long as a home loan as the replacement cycle for cars is generally 4 to 5 years. So customers want a loan tenure in line with their replacement cycle. With this small tenure, the ticket size is also low: industry average being Rs5.5 lakh. So materially, (fixed rates) do not impact the customer. The idea is to offer a “peace of mind solution”, as whatever rate was negotiated at the time of loan does not change with the interest rate cycle in the economy.

So while we have a fixed rate loan, we also have to fix our liabilities. So to maintain that balance, generally the option is not there with the customer to reprice the loan. Hence, the rate cannot be changed during tenure of the contract. The loan can be refinanced through another bank but you get a very competitive loan rate when you first buy a car. So while refinancing, you may not get a rate as good as the one you got at the time of the original loan. Car refinance rates are always higher in the market compared to new-car loan rates. Car is a depreciating asset. So when you go for refinancing, the value of the asset would have come down. So generally, there is a premium for that risk, unlike in case of home loans.

Rajiv Raj, co-founder and director, CreditVidya

Through refinancing, customers can do things like: switch to a lower rate of interest, change or eliminate co-signees to the original loan and alter the tenure of repayment. Depending on the eligibility of a borrower, some lenders also offer top-ups on existing loans.

The conditions for refinancing a loan vary from lender to lender. In case ability to repay a monthly sum is affected, they can also increase the tenure of the loan. Consumers also need to know the processing fees for refinancing a loan. It can be a flat fee or up to 1% of the loan amount, depending the size of the loan.

Secondly, they should also take into consideration the foreclosure charges with respect to refinancing. Refinance of car loans in India is not common, due to high exit costs in the form of foreclosure charges. Currently these stand in the range of 4-5% of the outstanding principal or the prepaid amount.

Refinancing should be done only if it benefits the borrower financially. High foreclosure rates often offset any benefits from lower rates of interest that the borrower would get through refinancing. Additionally, if the loan is in the first few months or year of repayment, a significant part of the EMI would still be towards payment of interest and the principal might not have reduced much. In this case, a refinancing would not help the borrower significantly, as the principal balance would remain the same.

Rishi Mehra, chief executive officer, Wishfin.com

Although the interest rates for car loans are generally fixed, those offering credit facility at floating rates have made it easier for consumers to make their vehicle dreams come true. Those who are already paying high interest rates, can lower their EMI burden by refinancing their car loans at lower rates.

Yes, it is possible to transfer your loan in the lending institute that offers lower rates in comparison to your current lender. Refinancing of car loans is applicable in such conditions where the borrower prefers to opt for lower interest rates on different terms and conditions proposed by the new lender or for reducing the loan tenure or wanting to remove co-signer from their existing car loan agreements or acceptability of longer loan tenure upon lower interest rates, which are offered by the new lender.

People thinking of refinancing should consider few facts such as what will be the processing fee and other charges, the new lender will be levying. Refinancing of vehicle loans is comparatively easy, quick and painless. The applicant has to pay minimal charges, which include processing fee and insurance covers offered by that particular lender.

However, refinancing may not be a good idea if existing loan includes a pre-payment penalty or other foreclosure charges. Also, if the borrower doesn’t want to extend the repayment period, then refinancing may not be the best option.

Pralay Mondal, business head - retail banking and business banking, Yes Bank Ltd

The usual practice adopted by NBFCs and private sector banks is to offer a fixed rate of interest. However, the public sector banks offer both floating and fixed rates. Yes, banks do allow you to transfer your car loan to other financiers. This is called balance transfer. Normally, there are fees and charges associated with such transfers. One should check the benefits of such transfers, net of any fees and charges. Unlike a home loan, there is no option to switch over to a loan offering a lower rate within the same bank/NBFC. Refinance consists of: a) balance transfer: switch to financier offering lower rate of interest; b) loan against car: transfer of outstanding loan amount along with some additional top-up amount.

The existing bank will not allow refinancing on an existing loan, it will only allow a top-up or the customer can foreclose the existing loan and take a new loan from the existing bank. The existing bank will levy foreclosure charges, though it has the discretion to waive these charges. The is refinance usually done through takeover by another bank/NBFC and will attract foreclosure-charge payments to the existing bank and some processing charges. Borrowers can refer to the schedule of charges in their loan agreements for this. These charges vary from financier to financier. Since these are mostly fixed-rate loans, refinancing is not possible by the existing bank.

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