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How do you refinance a car loan?

Peter Terlato avatar
Peter Terlato
- 7 min read
How do you refinance a car loan?

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

Even if you were pleased 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, market conditions or perhaps your personal 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.

Refinancing your car loan simply means taking out a new car loan to replace your current loan in order to access different loan features that may better meet your needs, such as a lower interest rate or shorter loan term.

When should you consider refinancing your 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 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.

Steps to consider when refinancing your car loan

It’s important to be thorough when refinancing a car loan. If you’re well prepared it can go a long way towards making the entire process much more streamlined and simpler:

Step 1: Determine your reasons for refinancing

There are a number of different reasons you might be considering refinancing your car loan. Some of these include:

Secure a lower interest rate: If your credit score has improved or interest rates have lowered, you may want to take advantage of this by refinancing to a loan with a more competitive interest rate.

Change your loan term: You might want to reduce or extend your loan term to suit a change in circumstances. If you’re able to make higher repayments than you are currently, you might like to refinance on a shorter term to potentially pay your loan off quicker and avoid additional interest charges. Alternatively, if you’re looking to reduce your repayments, you might consider lengthening your loan term. Keep in mind that this could mean paying a higher total amount as a longer term can typically mean paying more interest charges.

Access different features: If your current loan doesn’t offer certain features you’d like to access, such as allowing for extra repayments or a redraw facility, then you may consider looking for one that does.

Switch to a different lender: If you’re unhappy with the service provided by your current lender, you could potentially find a lender with a better reputation.

Add or remove a co-signer: There are a few reasons you might like to add or remove a co-signer from your current loan, one of which is to remove someone with a low credit rating in order to access more competitive loans.

It’s important to have a clear idea of what your refinancing goals are in order to choose the most suitable loan for you.

Step 2: Search and compare available car loans

RateCity makes it easy for you to compare a wide range of car loan refinancing options so you can find one that best suits your current individual needs. Be sure to focus on the key loan features that are driving your decision to refinance.

Step 3: Do the maths

Before you make a decision on which loan is right for you, remember to factor in any entry or exit fees that may apply. If one of your refinancing goals is to reduce the total cost over the life of the loan, it’s important to include these fees in your calculations. On the other hand, if you are refinancing to extend the loan term, make sure you understand how much additional interest you might end up paying if you make the switch.

Compare and save using our Car Loan Calculator

Calculate what your repayments could be on your car loan.


Step 4: Apply online

You might find that the application process is similar to your initial car loan application, but you will also need to provide some extra information on your current lender and details about your car.

Step 5: Await approval

After you submit your application, it’s just a matter of waiting to hear the outcome. If you are approved, you may need to pay any applicable exit fees to your previous lender and any potential upfront fees to your new lender at this time. 

Step 6: Use your new loan to pay off your old loan

Following approval, you may be required to organise paying off of your previous loan, if your new lender does not do so. Your lender will be able to answer any questions you may have about this process.

Step 7: Close your old account

Be sure to close your old loan account once it has been fully paid off.

Step 8: Make repayments on your new loan

Finally, you will begin to make your repayments on your new loan for the duration of its term.

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Product database updated 22 Jun, 2024

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