Car loan refinance: When does switching make sense?

When considering whether to refinance a car loan, the first factor to assess is the remaining interest on your current loan. To determine this, compare the total interest you would pay under your existing loan with the interest payable on the refinanced loan after deducting any switching costs, according to Sameer Mathur, MD & Founder of Roinet Solution.

For instance, a borrower with ₹5 lakh outstanding and 36 months left at a 10% interest rate could save around ₹4,216 by refinancing to 9.5%, or ₹8,414 by reducing to 9%. However, a 2% reduction to 8% would result in a net saving of approximately ₹6,755 after accounting for switching costs.

A borrower should also weigh the costs of refinancing, which may include foreclosure or prepayment charges, processing fees, GST, documentation costs, and RTO or insurance updates. These expenses must be factored into the decision, as Mathur suggests, "Net benefit = Interest saved − all refinancing costs." This approach provides a clearer picture than simply comparing advertised interest rates.

Moreover, refinancing may be less attractive when the loan is nearing maturity, as there may not be enough remaining principal to generate significant interest savings. Lowering the EMI alone does not guarantee a cheaper loan, as extending the loan tenure can increase total interest paid, even with a lower interest rate. For example, a ₹5 lakh car loan at 10% for three years would have an EMI of around ₹16,134 and total interest of approximately ₹81,000.

However, refinancing at 9% for five years would reduce the EMI to about ₹10,379, yet the borrower would pay around ₹1.23 lakh in total interest, resulting in a net loss of approximately ₹42,000 in interest due to the longer repayment period. Therefore, when evaluating a refinance offer, compare the total interest payable over the same remaining loan period and consider all costs involved to determine if the new loan produces a meaningful net saving.