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Things you need to know when applying for refinancing

applying for refinancingapplying for refinancing
applying for refinancingapplying for refinancing

 

Things you need to know when applying for refinancing

You have presumably heard about refinancing, but don’t have a good grasp of what it actually is. In short, refinancing is when you apply for a second loan in order for you to repay your balloon payment.

You receive a balloon payment when you take out a loan and want to lower your monthly installment. When you lower your installment you end up with a large balance you would need to pay once your finance period ends.

If you are wondering if you could refinance a balloon payment with another loan, the answer is yes. Lenders offer you refinancing should you need to settle the balloon payment for your vehicle finance.

If you are wondering how you can pay your balloon repayment loan, your lender has three ways in which you can pay it off. However, there are things a car buyer should know before applying for refinancing. Below are tips to assist you when taking out finance.

 

Understand your financial agreement

You find that there are many car buyers who take out car loans without entirely understanding their agreement. Make sure you sit down with the financial advisor and ask all important questions.

If you want to know more about your interest rate, don’t be afraid to ask.  Don’t get into a finance agreement without knowing what it entails, as this will only cause frustration and unnecessary problems.

 

Know your options

You have three options for paying your lump sum. You can either:

  • refinance
  • trade in your car
  • settle the remaining balance

All of the above can assist you even if you have a large balloon payment. If you have reached your breakeven point, which is when your trade value is higher than your outstanding balance, then you can sell your car.

That said, don’t make the mistake of selling your car before it reaches its breakeven point, as it will become a loss. You can opt to settle your account once payment is due, although most people can’t afford to settle which is why they prefer refinancing or trading in their vehicle.

 

Why you would need to refinance

If you’re unsure of whether you need to refinance, here is a guideline to help you. One of the main reasons one would apply for refinancing is if your loan term is coming to an end and you're unable to pay the outstanding balance in full.

Another reason is if you thought you would be able to settle the balloon payment at the end of your term and come to discover that your personal finances have changed. Refinance allows you to keep your car while staying on top of affordable monthly payments.

 

Your credit score is important

Despite people talking about how important a good credit score is, many people often forget how important it actually is. Financial service providers won’t give you a loan if your credit is bad and they won’t give you a refinancing as well.

Refinancing is a new loan, so, you need to have a good credit score in order for you to receive funding. According to the National credit act in South Africa, since refinancing has been newly introduced as a loan, you need to submit all the necessary documents. Once the financial service provider has your documents they need to assess your credit score - if you have bad credit you won't receive finance. Make sure you pay all your debts on time.

 

Common mistakes you need to avoid

When starting a new finance deal, there are things you should avoid. If you are planning on refinancing your loan, don’t take out another loan with a low monthly instalment. In order for you to settle your debt faster, it would be best that while you’re paying a lower instalment to be sure to pay off your other loans in the meantime. By doing that you can boost your credit score and clear up other debts.

Make sure that by the time you need refinancing that you don’t have any large debts you need to pay. This allows you to pay a higher instalment so you can settle the balloon amount faster helping you in the long run.

Make sure you don’t miss your payments. Missing payments is a slippery slope you should avoid. Missing payments not only ruin your credit score which will affect your chances of getting credit at a later stage but it also prolongs the time to settle your debt. The thing with missing payments is that it can easily become a habit and that won’t help you as you will accumulate interest.

Make sure that when it comes to your finance term that you call your lender to make sure you have settled all your debt. Often times people assume they have paid the total repayment amount which they haven't, making them miss payments.

Lastly, make sure you have insured your car. Insuring your vehicle is important, not only for unforeseen circumstances, such as theft or accidents, but you won't receive refinancing if your car isn't insured.

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