Can I refinance my car loan?

Can I refinance my car loan?

When it comes to your personal finances, it’s not a bad idea to keep an eye out for better offers on financial products that could potentially save you money.

Even if you were thrilled with the deal you got when you initially signed up for a certain product, there’s every chance circumstances may have since changed such as your income, the market or perhaps your credit score, meaning there could be even more competitive options available to you now.

Many Australian mortgage holders regularly compare home loan products to see whether refinancing could be beneficial to them.

But is it possible to refinance a car loan?

Simply put, yes, it is. However, there can be restrictions that prevent some borrowers from doing so. And even if you are eligible, there are still a number of factors to weigh up before making the move.

When should I consider refinancing my car loan?

There are a number of circumstances in which it might be a good idea for you to consider refinancing your car loan. Some of these include the following scenarios.

Interest rates have lowered

Depending on the state of the market, there’s a chance that there are now finance options with more competitive interest rates than your current loan. If the difference is significant enough, it could pay off to refinance to a loan with a lower interest rate, particularly if you are in the earlier stages of your car loan.

Your credit score has improved

If your credit behaviour has markedly improved since you first signed up for your car loan, your credit score could have also seen a boost. This might mean that more desirable car finance options are now available to you, with lower interest rates, better terms and conditions, more flexibility, or all of the above.

You want to reduce your loan term

A change in your financial situation, like a pay raise for example, could mean that you are able to afford higher repayments than you initially signed up for. Making higher repayments towards the same loan amount generally means you could pay off your loan faster.

However, your current loan may not allow for extra repayments, or there could be significant fees involved. If this is the case, you could consider refinancing to a loan with shorter terms and/or more flexible repayment features.

If this is something that you can comfortably afford, paying your loan off sooner can also save you money on interest charges over the life of the loan.

You want to extend your loan term

There can come a time where a blow to your financial circumstances may occur, such as a redundancy or unpredictable expenses, leaving you in a position where you are finding it difficult to meet your loan repayments. In this instance, lengthening your loan term could allow you to reduce your repayments to a more manageable amount.

It’s important to remember that while this may help with affordability in the short term, if you do extend your loan term, you could likely end up paying more in interest charges over the life of the loan.

Your current loan charges high ongoing fees

Some car loans have certain ongoing fees and charges such as monthly fees, missed payment penalties and redraw activation fees.

If the fees from your current loan seem to be adding up month after month, it could be worthwhile comparing these costs with those involved with refinancing to see whether it might pay to make the switch.

When should I avoid refinancing my car loan?

It’s not always going to be possible, or beneficial, to refinance your car loan. Some of the circumstances that might make this the case include the following.

You’re close to the end of your loan term

If you’ve only got a short amount of time left on your current loan term, you may find that any money that you could potentially save on interest charges or ongoing fees might be outweighed by the costs associated with applying for a new loan.

Even if you still stand to save a small amount, it’s a good idea to weigh that up with the time and effort it could take to refinance to a new loan to decide whether it’s truly worth it for you.

The value of your car is less than what you still owe on your loan

It’s fairly common knowledge that your car will depreciate in value over time. If you’re a few years into your current loan term and the value of your car is deemed to be less than what is still owing on your car loan, there’s a good chance a new lender may not approve your application for a loan. The main reason being that the lender could determine the loan too big a risk, as if you were to default on your loan, they would likely be unable to recoup the costs simply by selling the vehicle.

Consider doing your research and reaching out to potential lenders before submitting an application in order to minimise the risk of it being declined.

The cost in time and fees outweighs any potential savings

Refinancing your car loan will generally involve some kind of upfront fee payable to the new lender, in order to establish the new loan. On top of this, you may be charged an early exit penalty for ending your current loan prior to the contracted term. These costs, along with any other fees and charges that may arise, should be factored in when calculating any potential savings you hope to make by refinancing your car loan.

It’s also worth considering how much time and effort it will take you to refinance before making your decision to do so.

You want to prioritise your credit score

Regularly applying for new finance does have the potential to negatively affect your credit score. If, for instance, you have plans to apply for a mortgage in the not too distant future, you may consider holding off on refinancing your car loan for the sake of prioritising a much bigger financial commitment.

For advice specific to your personal financial circumstances, consider talking to a financial advisor.

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Learn more about car loans

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

What is a loan term?

The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

What is a guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.

What are loan repayments?

Loan repayments are the regular payments you make to pay off your car loan. Loan repayments generally occur on a monthly basis, although many lenders will also give you the option of making fortnightly or weekly loan repayments.

What is the role of a guarantor on a car loan?

The role of a guarantor on a car loan is to meet repayments if the borrower of the loan were to default for any reason, such as not being able to afford it.

Useful for loan applicants with poor or bad credit, a guarantor makes it possible for these loans to be made secure, because there’s less risk for a lender overall.

Companies will likely give fair warning before they charge a guarantor for the costs of the loan, or before they repossess anything of the guarantor’s that may have been used as security. Still, it is important for a car loan guarantor to fully understand their responsibilities before they commit to the transaction.

What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

What is a refinance?

A refinance is when you swap one car loan with another. For example, you might take out a car loan with Lender X because it is the best on the market at the time – but two years later, you might switch to Lender Y because you discover that it now has the best loan. Conditions and fees often apply when you refinance.

Can I get a discounted student car loan?

Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.

Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.

As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.

Can I get a loan if I am on aged pension?

Yes, there are certain lenders that provide loans for people on aged pensions. Your viability for a loan will be assessed by a lender by your credit report and your income. They will also take into account any assets you have that you may want to secure the loan with. The better your credit score, the more likely you are to be accepted for a loan, and the lower the interest you will have to pay on that loan.  

If you have a bad credit rating and are on an aged pension however, don’t despair, because there are specialised lenders who still may be willing to provide you with a loan.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

I’ve been denied a car loan before; can I still get car finance?

Even if you’ve been denied a car loan before, you might still be able to get car finance. The key is to make the right application to the right lender.

The ‘right’ application is one that makes you look like an acceptable risk, which might include things like improving your credit score, increasing your savings rate and accumulating a bigger deposit.

The ‘right’ lender is one that deals with borrowers like you. For example, while some car loan lenders only deal with good credit borrowers, there are others that specialise in bad credit or poor credit borrowers.