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3 Things To Consider Before Asking Your Auto Client To Refinance

Auto refinancing is not as common as refinancing a home, but in the past few years, people have been racking up more debt than ever in the midst of lowering interest rates.  This has caused refinancing automobiles more common than in the past.  For refinancing a car or automobile, many of the same things that one would consider when refinancing a home is true when refinancing an automobile as well. 

Depreciation of the Asset

There is one primary difference between these two items though that needs careful consideration.  That difference is that a home is generally an appreciating asset while an automobile is a depreciating asset.  Very few vehicles gain value as time goes by except certain antique vehicles..  This changes the game when considering whether to refinance a car or automobile

This changes things because first, to refinance an automobile means the person must have equity in the vehicle.  In other words, the car must be worth more than the amount of debt they already owe on the vehicle...otherwise the lender will be assuming substantial risk in the event of a default on the loan.  It seems simple but very important to value the vehicle accurately and conservatively so that the individual does indeed have the amount of equity you believe they do.   Otherwise your borrower may shortly be underwater on their new loan.  And as US News will tell you, it’s not easy to get out of an underwater loan.  

In addition to the lender understanding this important fact, it is the lender’s duty to help the borrower understand that as well.   The borrower must understand that the vehicle will depreciate and potentially depreciate faster than they can pay off their debt...causing them to be ‘underwater’ on the loan which isn’t in the best interest of the lender or the borrower.  

The Financial Awareness Of Your Client

Second, if you are the lender, you should gage and measure the necessity for your client to refinance.  As a loan broker, you are there to educate and ensure that your client is making the best decision for them and that you aren’t just trying to collect a paycheck.  Sure, you have to work and earn a living but you must be ethical in the process and not prey on those who don’t have the strength and discipline to make the right decision.  It’s especially important to gage this in light of the first point...the fact that their car will depreciate over time. 

Saving Your Client Money and the Time Value of Money Concept

Third, it is your job to ensure that the new car loan the client is refinancing into is not more expensive than their current loan.  Of course, the assumption is that the client is refinancing for the purpose of saving money even though there are other reasons a person may refinance.  But regardless of their reason, wouldn’t it be great knowing that you helped them save money. 

How can you ensure you’ll save your client money?  Unfortunately, saving your client money isn’t as easy as just making sure their monthly payments are lower than they are in their current loan.  This also means you’ll have to measure the commission and fees that are being charged to originate the loan.  It’s impossible to measure this without factoring in the time value of money.  Let us explain. 

Since the commision and fees are usually charged up front, and loan payment savings usually come gradually over time, it means that these savings must be discounted back to the present value in order to ensure the savings are larger than the commission or fees being charged.  How does one do this without complex calculations?  By using IQ Calculators calculator that does this for you by entering some basic information.  See and use their auto loan refinance calculator here.  It’s not the easiest to understand but essentially the present value between the two loans must be compared and determine which loan is cheaper for the client. 

In conclusion, as the lender or broker providing the loan, these are three very important items to walk through with your client so that they make the best decision for their financial life.  As we stated earlier, these are ethical questions for you as the lender as much as they are financial questions for your borrower.  We hope these pointers have been helpful to make you a better lender or broker for your clients. 

Views: 27

Tags: Auto, Client

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