Refinancing, in its most common form, actually stemmed from home loans and mortgages. It literally transfers an existing, outstanding loan to another obligation of debt, but instead, bearing different terms, usually more favourable to the customer.
Think of it this way - you owe bank "A" $1000 with a 5% interest rate, per month, to be paid over a period of 12 months. However, you stumble upon a repayment plan that only garners a 3% monthly charge. Lets just call that company "B"
What a typical consumer might've done in this situation, is to engage the services of company "B" in order to pay off all outstanding debts to bank "A," thus in the process, continuing your loan repayment on company "B's" terms instead, which could have probably saved you some money in the long run.
The same applies to vehicle refinancing, albeit there are other factors to take into account which will of course, be explained below.
Suppose you sign on the dotted line for a loan of $65,000 for 10 years with interest rate at 3.5%.
Loan amount = $65,000
Total interest payable per year - $2275
Total interest payable at the end of 10 years - $22,750
That brings the total loan and interest amount to $65,000 + $22,750 - a whopping $87,750
This brings your monthly loan instalment for an $87,750 loan to $731.25
This is where refinancing takes centre-stage. You might opt to refinance your car loan simply because you want to save on your monthly repayments over the long term.
Suppose you have paid 36 months of instalment, before you decide to take a refinancing package at 2.2%, the current refinancing interest rate.
You have paid $731.25 x 36 months, or $26,325 so far
Total interest rebate based on rule 78 will be (84 x 85) / (120 x 121) x $22,750 = $11,186.98
Assume that a 20% penalty charge imposed by bank for early loan redemption applies - (20% of $11,186.98, or $2,237.40)
The total amount payable to pay off your current loan of 3.5% per annum would therefore amount to $87,750 - $26,325 - $11,186.98 + $2,237.40 = $52,475.42
If you choose to refinance this outstanding amount at an interest rate of 2.2% interest rate, your monthly instalment will be reduced slightly for the next 7 years.
Assume that we will refinance the abovementioned amount of $52,475.42 for another seven years.
Loan amount - $52,475.42
Interest per year - $1154.46
Interest paid over the next 7 years - $8,081.21
Therefore, the total amount to be refinanced with interest will be = $52,475.42 + $8,081.21, or $60,556.63
This brings the monthly instalment of $60,556.63 over 84 months to $720.91
This saves you $10.34 a month, or $124.08 a year. Over the next 7 years, that amount multiplies to at least $868.56. Take note that this amount could be more if your car isn't subjected to an early settlement penalty or rule 78.
