Refinancing a car loan simply means switching from one car loan to another, usually with a different lender. This could be done to access cheaper interest rates, lower fees, or easier payment options to help you pay off your car loan sooner. Refinancing could save you hundreds or even thousands of dollars on your car loan, depending on how much you've borrowed.
How to refinance a car loan
- Compare the available car loan options for refinancing.
- Calculate the costs you'd pay versus the benefits you'd enjoy by switching your car loan to a new lender.
- Contact the new lender to make an application to refinance.
- The lender will approve or reject your application based on your financial circumstances, your credit rating, and their terms and conditions.
- Pay any required exit fees to your old lender and any upfront fees to your new lender.
- Start making repayments on your new car loan!
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Why do people refinance car loans?
- To save money: A car loan with lower interest rates or fees could help you enjoy cheaper car loan repayments.
- To manage a balloon payment: Sometimes dealer finance lets you enjoy lower monthly car loan repayments by adding a large balloon payment to the end of your loan term. Rather than paying it back all at once, refinancing your balloon may let you spread your payments over a longer term.
- To join a better lender: Switching your car loan to a new lender could let you enjoy discounts on other offers, better customer service or other add-ons.
What are the main features to look for when refinancing a car loan?
Interest rate: The cost of having the money that you'll pay back to your lender each year. This may be set at a fixed rate that keeps your repayments the same, or a variable rate that could rise or fall.
Comparison rate: An estimate of your car loan's overall cost, including interest charges and standard fees.
Fees: Car loan fees can include upfront fees and ongoing fees. You may also need to pay fees to use certain features, such as a redraw facility or exiting the loan early.
Security: Secured car loans use the car's value to guarantee the loan, which can mean lower interest rates. Unsecured car loans may be more flexible, though their interest rates may be higher.
Extra repayments: Some lenders let you pay extra onto your loan when you can afford it. This can reduce the interest you're charged, and bring you closer to exiting the loan early.
Redraw facility: Car loans that let you make extra repayments may also let you redraw money from your car loan when you're ahead on your repayments and find yourself in need of cash.
What are the pros and cons of refinancing a car loan?
- Lower repayments: Switching to a car loan with a lower interest rate can make your monthly repayments more affordable.
- Better loan features: The right features could make your new car loan much more flexible.
- Better service: Lenders offering better customer service or more convenient options could make your life easier.
- Pay more interest over longer term: If you refinance to a car loan with a longer loan term, your repayments may be lower. However, your loan will take longer to clear, so you may pay more in total interest charges than on a shorter-term loan.
- Switching costs (exit and upfront fees): The cost of break fees for leaving your old car loan and/or upfront fees for starting your new car loan could make refinancing less cost-effective.
- Car age/model may limit available loan types: Some secured car loans may be limited to newer cars whose value can cover the loan. Refinancing to an unsecured loan for an older car could mean paying a higher interest rate.
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.
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.
Depreciation is the reduction in the value of your car. Almost every car loses value each year, although at different rates. As a guide, cars depreciate on average by 14 per cent per year in the first three years and then eight per cent per year after that.
Mark Bristow is a senior financial writer for RateCity and an experienced analyst, researcher, and producer. Working for over ten years, Mark previously wrote and researched commercial real estate at CoreLogic, and has seen articles published at Lifehacker and Business Insider, among others. Most recently, Mark has joined RateCity working across finance as a whole. Whatever the topic, Mark’s goal is always to provide simple solutions to complex problems.