Did you know that refinancing your car loan can help improve your total debt servicing ratio?
You may not be aware, but the interest rate on a car loan is typically higher than other types of loans.
This means that if you are trying to get better rates on credit cards or another type of loan, refinancing your car loan could actually have a positive impact on your TDSR.
Let’s explore the benefits of refinancing and how it can help you with your financial goals.
What is the Total Debt Servicing Ratio (TDSR)?
The Total Debt Servicing Ratio (TDSR) is a metric used to measure the amount of money being paid on all debt obligations.
This includes both principal and interest but excludes taxes, insurance, or other savings.
The TDSR is calculated by dividing total monthly payments for credit card balances, auto loans, student loans, mortgages, and any other form of debt servicing by your bank into your gross monthly income.
For example, if you have $500 in credit card balance repayment per month with an interest rate of 20%, then that would be equal to $100 in interest expense, which means the TDSR would be 5/10ths or 50%.
Why Should I Improve My TDSR?
The total debt servicing ratio is an important number that determines your ability to repay your mortgage.
This number rates the percentage of income that goes towards paying debts, and it’s also a good indicator for those looking to purchase property as it relates to affordability.
If your total debt servicing ratio is too high, it may indicate that you are in financial trouble and need to seriously consider making some changes.
In addition, if you want to improve your credit score, one of the best things you can do is keep your total debt servicing ratio below 50%. The lower this number gets, the better.
This means that for every dollar you make, less than half of it should be going towards paying off a loan or a bill.
How Does Refinancing Work?
If you find yourself in a tight spot and need to get out of debt quickly, refinancing your vehicle might be the best option for you.
Refinancing will allow you to pay off your current loan and take on a new one with better terms (like lower interest rates) while still keeping your car!
If you have good credit, it can be a great option for saving money on your monthly payments and reducing the total amount of interest paid overtime.
This can be useful if you want to lower your monthly payments, pay off your vehicle sooner, or even change the terms of the original loan.
Refinancing may not be for everyone, though: some people like their old loan and want to keep it while others don’t have enough equity in their home yet.
Wrapping It Up…
To sum up, refinancing your auto loan may be a reasonable option if you find a lower rate of interest or a longer amortization term that appeals to you.
It’s also important to be mindful of the TDSR framework because it can help you navigate your debts and make better decisions when taking out a loan.