What is a refinance car loan?
Refinancing a car loan simply means switching from one car loan to another. A refinance car loan can help borrowers get a better deal on a car they’re currently paying off. By refinancing a car loan, a borrower could enjoy a variety of benefits, such as lower interest rates, lower or no fees, and easier payment options to help get the car paid off sooner.
If you get your car refinancing right, you could save hundreds or even thousands of dollars on your car loan, depending on how much you’ve borrowed.
Can I refinance my car loan?
Refinancing a car loan is not a difficult process and it’s one you can undertake yourself, simply by comparing the available options then making an application with a lender.
If you don’t have enough time to refinance your car loan yourself, or you could use some professional help getting started, a finance broker or financial adviser could point you in the right direction.
How do refinancing car loans work?
Refinancing a car loan simply means switching to a different lender. The refinancing process works like this:
- Compare the available refinance car loan options.
- 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.
- You’ll 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!
Why do people use refinancing car loans?
- To save money: Lenders may offer better interest rates and fees when you're exploring your refinancing options, so you could enjoy reduced car loan repayments.
- To manage a balloon payment: If you got dealer finance for your car, you may have enjoyed lower car loan repayments, but have a balloon payment that needs to be covered at the end of your loan term. Refinancing may allow you to pay back the balloon over a longer period if you don't have the lump sum immediately available.
- To join a better lender: Car loan offers vary, and lenders are always looking for new business. Refinancing with a new lender could let you enjoy discounts on other products, better customer service or other add-ons that may not have been available from your former lender.
What are the main features of a refinancing car loan?
Like other car loans, refinancing car loans are specialised personal loans, with the same kind of main features:
- Interest rate: The percentage extra you’ll pay back to your lender each year. May be set at a fixed rate that keeps your repayments consistent, or a variable rate that could rise or fall.
- Comparison rate: An estimate of your car loan’s overall cost, accounting for the interest charges as well as the standard fees.
- Fees: Car loan fees can include upfront fees and ongoing fees, as well as fees for using 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 offer greater flexibility, though their interest rates are often higher.
- Extra repayments: Some car loans let you pay extra when you can afford it, reducing the interest you’re charged, and bringing you closer to exiting the loan early.
- Redraw facility: Car loans offering 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 car loans?
- Lower repayments
- Enjoy loan features
- Join a better lender
- More interest over longer term
- Switching costs
- Car age/model may limit loans
- Lower repayments: Switching to a car loan with a lower interest rate can help make your regular car loan repayments more affordable.
- Enjoy loan features: A new loan with the right features could add much needed flexibility to your car loan.
- Join a better lender: Lenders offering better customer service or more convenient options could make life that little bit easier.
- Pay more interest over longer term: If you refinance your car loan onto a longer loan term, your payments may be lower, but your loan will take longer to clear, meaning you’ll 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 value. Refinancing to an unsecured loan for an older car could mean paying a higher interest rate.