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Can I extend my car loan term?

Can I extend my car loan term?

Purchasing a car is one of the bigger financial commitments the average Aussie will take on, which is where vehicle financing comes in. But sometimes the original car loan term you agree to is no longer financially suitable, in which case you may want to extend your car loan term.

The main reason you may want to extend a car loan term is typically to lower your regular repayments. A short-term car loan is generally between 1-3 years, and a longer-term car loan is 3-5 years, with some car loans extending to 7 years and above.

Depending on your interest rate and fees, the shorter your car loan, the higher your ongoing repayments but the less interest you’ll pay over the life of the loan, and vice versa for longer-term car loans. And if you’re struggling financially, continuing to make the same higher repayment amounts on a short-term car loan may become difficult. This is where extending your car loan term may be helpful.

For example, a $20,000 car loan with a rate of 6% has vastly different monthly payment amounts and total interest charged when you compare a 2-year and a 5-year loan term. While a 2-year car loan may charge less interest overall, the monthly repayments are over double what is charged on a 5-year car loan.

Repayments on different car loan terms - $20,000 loan at 6% interest rate

Car loan termMonthly repaymentsTotal interest chargedTotal loan cost
1 year$1,721$656$20,656
2 years$886$1,274$21,274
3 years$608$1,904$21,904
4 years$470$2,546$22,546
5 years$387$3,199$23,199

Source: RateCity.com.au. Note: Hypothetical repayments based on $20k loan at 6% interest rate. Does not factor in fees or rate changes.

Your car loan lender may allow you to extend your car loan term by refinancing your loan. Let’s explore how refinancing a car loan works and the potential advantages and adverse effects of extending your car loan term.

How do you refinance a car loan?

If you need to extend your car loan term, may want to consider refinancing your car loan. Generally, refinancing a car loan means switching from one loan to another but usually with a new lender.

If you’re keen to stay with your current lender, you may want to speak to a customer service representative to see if internal refinancing is available to you based on your financial situation. But, if you’re looking to extend your loan term and want to switch lenders, you’ll need to do your research.

There are a few simple steps to follow to help you find a shortlist of competitive car loan options:

  • Hop online and compare – Use comparison tools, like tables and ratings systems, to help filter down and compare car loan options. Comparison tables may help you better compare apples with apples, as you can view the pros and cons of various car loan options side by side. Comparing interest rates, fees and features may help you paint a full picture of which new loan may better suit your finances.

  • Do your calculations – You’ve narrowed down a short-list of potential car loans. Now is the time to see how those loans may suit your budget. If you’re extending your car loan term for financial reasons, this step may be vital. RateCity’s Car Loan Calculator lets you enter in the loan amount, loan term and interest rate to discover the estimated repayments for the new loan.
  • Financial health check – The final step to consider before you refinance your car loan is assessing your personal finances through a financial health check. This is essential in helping lower the risk of your application being rejected by not meeting a lender’s eligibility criteria. Just because you were approved for a car loan once, does not guarantee instant approval next time.

    Go through your personal finances, including your credit report and credit score, and look for any errors, debts that need to be repaid and areas that can be improved. For example, if you’re extending a car loan term for budgetary reasons because you’ve recently lost income or your job, this may mean you’re not eligible to refinance. You may need to meet certain income minimums to be approved for car loan refinance. Or, if you’ve accrued a lot of debt from multiple credit cards while paying off your car loan, this may put your application at a disadvantage until these balances are repaid.

What are the benefits and disadvantages of extending your car loan term?

Making the decision to extend your car loan term is a personal one and not a decision to be made lightly. It’s important you weigh up the pros and cons of extending your car loan term before you proceed.

Benefits of extending a car loan term:

  • Lower ongoing repayments – as illustrated above, the longer your car loan term the smaller your ongoing repayments.
  • Lower interest rates and fees – If you choose to refinance with a new lender, you may be able to pick up a lower interest rate or fewer fees with your new car loan.

Disadvantages of extending a car loan term:

  • More interest charged – Again, as illustrated above, extending your car loan term means you’ll be extending the amount of time interest will be charged on your loan amount. This means you may potentially pay more for a car loan than if you had kept a shorter loan term.
  • Switching fees – Some lenders may charge a variety of fees to refinance a car loan, including exit fees from your current lender and upfront and ongoing fees from the new lender.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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Learn more about car loans

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.

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.

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 vehicle finance?

Vehicle finance, also known as a car loan, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Vehicle finance can be used for both new and used vehicles.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

What is a dealership?

A dealership is a car yard or a place where cars are sold.

Can you refinance a car loan with the same lender?

You may be looking to refinance your car loan to get lower interest rates or reduce the total monthly amount you have to pay. Often, this leads to the question ‘can I refinance a car loan with the same bank?’

While it’s always worth shopping around for a better deal or at least to compare offers from other lenders, you can sometimes refinance to a different loan with the same lender. It may be simpler,  as the lender already has your details and knows your repayment history. 

Having said that, knowing the terms offered by other lenders may help you negotiate a better deal with your current lender.

Should I service my own car?

There are also costs associated with vehicle ownership, such as paying for petrol and the obligatory ongoing maintenance. But should you cut down on costs by servicing your own vehicle?

If you’re considering getting out the tool box, spanner, and grease-laden towel, you need to carefully weigh up the risks and benefits. A trained mechanic will need to complete certain tasks, while you may be perfectly capable to handle other aspects yourself.

If you’re short on time, it may be worth paying for the convenience of a full vehicle service. However if you’re trying to slash your expenses, there are some basic maintenance tasks that you can complete yourself.

You should call a mechanic if you’re unsure about a vehicle maintenance task you’re about to take on. However there are a number of maintenance tasks that you may be able to complete with your own two hands including:

  • Replacing your car battery
  • Changing the oil
  • Replacing worn windscreen wipers
  • Replacing blown fuses

Remember to keep your car’s body in good condition, by washing and applying a protective wax on a regular basis, too.

Always check your car warranty agreement as some new car purchases come with an extended car warranty provided your services are conducted at the vehicle service centre where you purchased the car. In these circumstances, you may find the service fee is capped, alleviating some of the maintenance woes.

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 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.

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.

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 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.