Refinance Car Loan Rates

If, in the middle of your car loan term, you've found a better deal or your financial situation has improved, refinancing could be a smart way to reduce your costs and improve flexibility.

What is car loan refinancing?

Refinancing your car loan means switching from your current loan to a new one, usually with a different lender, to access a lower interest rate, reduced fees, better features, or to consolidate other debts.

In most cases, the refinancing application process is similar to taking out your original car loan. You must meet the lender's eligibility criteria, which usually include your age, residency, income, expenses, and credit history. To support the information provided, you'll also need to present documentation including:

• Government-issued ID (e.g., passport, driver's licence)

• Proof of address (e.g., utility rates bill)

• Recent payslips and/or bank statements

• Comprehensive car insurance policy

Benefits of refinancing your car loan

Refinancing your car loan may offer several advantages that can save you money and improve your financial situation. Here are some key benefits to consider.

1. Secure a lower interest rate

If market rates have dropped or if your credit score has improved, you may qualify for a lower-rate car loan when you refinance. This could result in lower monthly repayments and overall interest costs.

For example, let's say you took a $20,000 car loan with a 10% p.a. interest rate over 4 years. You've paid off one year, and your remaining balance is $15,720 of the principal (you would have paid a fair bit in interest, too). You then refinanced to a new lender and received a 6.5% p.a. rate over a 3-year term.

To illustrate the difference between keeping your original loan and refinancing, see the table below.

By switching, you could save nearly $1,000 in interest over the whole life of the borrowing. Just make sure to compare any fees involved (e.g., exit fees) to determine if the interest savings offset the charges if you refinance.

Considering many cars these days cost a lot more than $20,000 you could also realistically stand to save a lot more.

See Also: InfoChoice Car Loan Calculator

2. Consolidate other debts

Refinancing allows you to consolidate other high-interest debts, such as other personal loans, into your car loan. This simplifies your finances into one single repayment and may reduce your overall interest burden, especially if your car loan offers a lower rate.

3. Shorten or extend your loan term

Refinancing your car loan can also allow you to adjust the loan term.

If you currently have a long-term loan and wish to pay off your vehicle sooner, refinancing to a shorter term can help you become debt-free more quickly. However, expect that this option will likely see your regular repayments increase in size.

Alternatively, refinancing to a longer term will lower your monthly repayments, though it will increase your overall interest costs.

4. Access better loan features

Different lenders offer various features for car loans. Refinancing can give you access to extra repayment flexibility, redraw facilities, lower ongoing fees, and loans tailored to your needs (e.g., car loans for electric vehicles).

Quick tip: Some lenders offer green car loans with discounted rates for eligible EVs and hybrids.

Things to consider before refinancing

Refinancing your car loan could put you in a better financial position as long as it fits your current circumstances. Here are several factors to consider to help you assess.

Interest rate type

If you're on a fixed rate car loan, you may be charged break fees for exiting early. These costs can outweigh the benefit of switching, so check whether such will be the case if you refinance. On the other hand, variable rate loans typically allow more flexibility when refinancing.

Quick tip: Generally speaking, you need to be on a variable interest rate to reap the benefits of refinancing.

Fees and other costs

Always check for application or setup fees, discharge fees from your current lender, break costs (for fixed loans), monthly or annual account keeping fees, and valuation charges. Even if the new rate is lower, high fees can erase your savings, especially if you're near the end of your loan term.

Current car value

Cars are a depreciating asset. The Australian Tax Office (ATO) estimates cars lose their value by 25% per annum. As such, if your loan balance exceeds your vehicle's market value (known as negative equity), lenders may see you as a higher risk, making it harder or more expensive to refinance. This could be exacerbated if you also have a balloon payment at the end of your loan term.

Remaining loan balance and term

Consider the outstanding balance on your current car loan. The bigger your remaining loan, the higher your interest rate, and the longer your term, the more you could stand to gain from refinancing, as the potential savings on interest will be more substantial. If you're close to the end of your loan, refinancing may not be worth the fees and effort.

Credit score

A stronger credit score means better interest rates. If your score has improved since you obtained your initial car loan, you may be eligible for a lower rate. However, if it's worsened, refinancing may not yield the benefits you're seeking to achieve.

Quick tip: Too many applications can hurt your credit score. Use a car loan pre-approval tool or a comparison website to check eligibility without impacting your score.

When is the right time to refinance?

You can technically refinance any time after your loan begins. However, most borrowers wait at least 6-12 months to build up a repayment history and equity in the vehicle.

Generally speaking, the bigger the balance, the wider the interest rate difference, and the longer the original loan term, the more you could benefit from refinancing.

Here's a checklist to determine the ideal time to refinance:

✅ Market rates have dropped

✅ Your credit score has improved

✅ You have at least 2+ years remaining on the loan

✅ Your car has retained good market value

And a checklist if you're eligible for car loan refinancing:

✅ You've consistently made repayments on time

✅ Your car is less than 7-10 years old

✅ Your loan balance is more than $5,000

✅ Your credit score is stable or improving

✅ You're ready to pay potential exit/setup fees

Remember, every individual's circumstances are unique, and what works for one person may not work for another. Evaluating your personal and financial situation can help you determine if it's the right time to refinance.