In India, auto loans typically span several years, with applicants paying nearly double the original loan amount when interest and other charges levied by the lending institutions are included. Over the duration of the loan tenure, you slowly build equity in the car, which refers to its current resale value minus the pending loan amount.
UItilising this equity through a process called cash-out refinancing allows you to take out a new, larger loan that pays off your existing auto loan while also providing extra cash. This surplus money gets directly disbursed for utilisation towards other financial needs.
Make sure you find the lowest possible interest rates for your cash-out car loan refinance to get the maximum benefit. This article provides essential tips for car loan refinancing to help you secure the most favourable terms.
Best Strategies to Get Competitive Rates on Cash-Out Car Loan Refinance
Here are some tips that will help you get the best rates on cash-out car loan refinance:
1. Boost your Credit Score
Your credit score reflects your historical repayment behaviour and is a key metric that financial institutions consider when deciding interest rates to offer. The higher your score, typically over 750, the lower the interest rate you can secure. If your current score is fair, take proactive steps in the 6-12 months prior to your loan application to boost it.
To increase your credit score above 750 before applying, make sure you pay your debts on time, avoid applying for too many loans, lower your credit card balances, and check your credit report for potential mistakes.
2. Evaluate Equity in the Car
The equity in your car is essentially its current resale value in the open market minus what you still owe on your existing auto loan. Loan providers will typically fund no more than 80-90% of your car’s value through the refinance, so the amount of equity you have in your car decides the highest loan amount and cash you can get.
The higher your car’s equity at the time of applying, the higher the chances of getting better interest rates along with loan approval. If your car’s equity is very low, lenders see this as a higher risk, which can lead to higher interest rates or even rejection of your application, leaving you with fewer options and possibly less favourable rates from other lenders
3. Research Historical Interest Rate Trends
Auto loan interest rates change over time based on factors affecting car refinance rates, like central bank policies, industry liquidity, market competition, etc. Over the 6-12 months preceding your planned application, comprehensively analyse the historical movement of interest rates in the market to identify market trends and understand the best timing to apply when rates are lower.
Sometimes, merely waiting for 2-3 additional months could make a measurable difference to the prevailing rates on offer vs applying in haste. Timing your application judiciously based on market trends can ensure that you benefit from the lowest rates on offer during that period.
4. Maintain Steady Income Sources
Financial institutions view applicants with stable, salaried jobs much more favourably compared to those with unpredictable freelance earnings or profits from a business venture when assessing credit risk for auto financing. Having continuity of at least 2+ years with your current employer additionally provides reassurance.
If, however, you have switched jobs recently or have variable income streams, still apply, but be prepared to potentially get higher rates due to the perceived risk of income fluctuations. If possible, highlight other positive aspects in your application to compensate for this risk and better your chances.
5. Reduce Existing Debt Burdens
Banks and NBFCs will scrutinise your capacity to take on and manage additional debt obligations by studying your credit report for existing loans and credit card dues. If your credit utilisation levels are already high or have multiple outstanding liabilities, it increases the risk perception of loan providers, making them reluctant to extend large sums even if your income seems adequate.
This negatively impacts the rates on offer. To ease loan providers concerns, you should work on paying down some expensive existing debts to a manageable level first before proceeding with your refinance plan.
Conclusion
Following these tips will help you proactively take steps to boost loan providers confidence in your creditworthiness and repayment capability. This results in increased approval odds and the most competitive interest rates possible on your cash-out auto refinance loan compared to standard rates for auto financing. Shriram Finance offers used car loans and car refinancing products that allow you to access funds by leveraging your car’s value. Pay attention to finer aspects such as credit score, income stability, loan duration, etc., apart from just the interest rate alone to get the Best Rates on cash-out car loan refinance.
