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 term||Monthly repayments||Total interest charged||Total loan cost|
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.