Refinancing a car loan can be as simple as applying for alternative finance with a new lender.
But how do you know if you should refinance your car loan? Well, it depends on what you are trying to achieve.
You then will have to do some calculations to work out if you will be better off and can achieve the objective.
Not sure where to start?
In this article, we will cover every aspect of auto refinancing including what outcomes may benefit you, how to determine the outcome before you take action, and when not to refinance!
In This Post:
What is Car Loan Refinancing
Car loan refinancing is when you replace your existing loan with a new one.
You would only do this if it is on better terms than your current loan.
This could mean a lower interest rate, a reduced monthly repayment,a lower fee structure, or dealing with a balloon payment.
Essentially, you’re hitting the reset button on your car loan, often with a new lender offering a more competitive deal.
Why Refinance Your Car Loan?
You should only refinance a car loan if you will be in a better position with a new lender.
This can mean different things to different people but the most common scenarios are below.
Note: the examples in this section are to demonstrate each variable and are not complete real-world examples (we’ll get to these later in the article).
Lower Cost Loan
If your current loan has a higher interest rate or fee structure then you may save money by refinancing to a new loan.
Car loans can be tens of thousands of dollars and saving even 2% on your interest rate can be a significant saving over the life of the loan.
Loan terms can be upwards of 5-7 years. Over that time interest rates change, your earning capacity changes, and your credit score can also shift.
As you become a lower-risk customer you may become eligible for cheaper loan products and a switch could make sense.
Lower Interest Example:
- Loan Scenario: $30k loan $12% interest repayable over 5 years.
- Balance after 2 years: $20,553 remaining payable over 3 years.
In this scenario, there is $4,137.80 worth of interest still payable over the remaining term of the loan.
There is another lender who is willing to refinance the borrower at a 9% interest rate. This would reduce the interest payable significantly.
- Current loan cost: $4,137.80
- Refinance cost: $2,975.88
- Savings from refinancing: $1,161.92
Lower Monthly Repayments
If you need to relieve some pressure on the household budget then refinancing your car loan can reset your loan term and spread out your remaining payments over a longer period.
This could reduce your repayment significantly, but it will also cost you more over the long term.
In some circumstances, this is a necessary move.
Lower Repayment Example:
Using the same loan example as above, except in this case the alternative lender is also charging 12% interest but is willing to refinance over an additional five-year loan period.
The repayments for each loan are below:
- Curent loan repayments: $667.33
- Repayments on refinance: $457.19
Repayments are now $210.14 a month lower after refinancing the loan.
But, what does that do to the total cost of the loan? The borrower will now repay $6,878.41 over the new five-year term.
This is $2,740.61 in additional interest costs the borrower will pay as a result of the refinance.
Repay Your Loan Faster
Refinancing your car loan can be a great way to repay the loan faster!
A lower rate, fee structure, and a shorter loan term can all work together to save you thousands of dollars compared to your current loan.
Fast Repayment Example:
Back to our first example where we refinanced the borrower from a 12% interest rate to a 8% rate.
What happens to the repayment term if the customer refinances but chooses to retain the same monthly repayment as the original loan?
- Current loan cost: $4,137.80 and 36 months remaining to repay
- Refinance loan cost with extra repayments: $2,529.31 over 35 months
- Savings from refinancing: $1,608.49
In this case, we will pay the loan off 6 weeks sooner (the final payment is around half the regular monthly repayment), and save over $1,600 from refinancing!
Paying a Balloon Payment
A car loan can be structured to include a large lump sum payment at the end of the loan term.
This reduces the repayment amount for the life of the loan, but you may have a hefty final payment to make.
This can sneak up on you if you do not plan for it.
Often, it is a better option to refinance the loan prior to the balloon payment being due.
Balloon Refinance Example:
You have a balloon payment of $10k payable as your final repayment. Instead, you refinance that amount to an alternative lender at 9% interest over three years.
- Curent loan repayments: $10,000 due at once
- Repayments on refinance: $318.00
But of course, when you extend your repayment timeline you are going to incur additional costs.
In this example, you will repay an additional $1,447.90 in interest cost over the course of the three years.
This may still sound far better than having to find $10k!
Lower Fees
Some lenders charge hefty monthly fees which can add significant cost over the life of a loan.
Consumers can be sucked in by a low interest rate and not pay attention to the $28 fee they are also paying.
This can happen when loan contracts and comparison rates are not well understood, or not even read!
Refinancing to a lender with the same interest rate but lower fees can also save you money over the life of the loan.
Lower Fee Example:
We have not touched on fees in any of these examples yet. But they do exist to varying degrees depending on your lender.
Let’s look at the same $30k scenario but the lender charges a $28 monthly fee.
You are refinancing to an alternative lender at the same 12% interest rate, but $0 in monthly fees for the remaining three years.
- Current loan cost: $5,145.80
- Refinance cost: $4,137.80
- Savings from refinancing: $1,008.00
In this scenario, you are saving the $28 fee 36 times! That really adds up over time!
Steps to Refinance a Car Loan
The following steps should be taken to ensure that you are only refinancing into a car loan that will leave you better off overall.
Establish The Outcome You Want
First, you need to be clear on your goals.
Is it to reduce the cost of your loan, lower repayments, repay your loan faster, or avoid a balloon payment?
Once you know what you are trying to achieve we can get started on the process of finding the right lender to meet these objectives.
Review Your Current Car Loan Contract
There may be early repayment fees that you will be liable to pay when refinancing your car loan.
It is important to quantify these fees early in the process so you can determine if it is worth refinancing your car loan at all.
You will need to provide this information to your broker so they can account for this as part of their assessment of your options.
Conduct a Preliminary Assessment
A broker will assess your financial circumstances and credit history to determine what finance options may be available to you.
We have access to over 40 lenders and they all have different credit policies that are constantly changing.
Our team of expert brokers have a working relationship with these lenders and will be able to match you with a lender offering loans that achieve your refinancing goals, and are most likely to approve your application.
Loan Application
Once we have found the right lender for you it is time to prepare your refinance application.
The good news is that your broker has already collected most of the information required to submit a complete application to your chosen lender.
There may be some additional documents required but the work here will be minimal.
Approval and Settlement
Once your application has been assessed and approved your new car loan contract will be provided to you.
Your broker will be on hand to explain your new agreement and the timing of payment to your current lender to close your loan.
Security Registration
Your new lender will also register an interest against your vehicle on the Personal Property Securities Register, or PPSR.
This is only done for secured loans and will remain in place until the loan is repaid in full.
When is the Right Time to Refinance?
It may be the right time to refinance if you are in one of the scenarios below that creates the opportunity to move your car loan to a more suitable lender.
As we have discussed, the motivation to refinance can vary. Sometimes there is an opportunity to save money and other times it is to get you out of a jam.
Time to Refinance to Save Money
Interest Rates Have Fallen
If interest rates are falling across the market then there may be some great deals being offered by alternative lenders.
You will only be able to access them by refinancing your car loan.
Your Credit Score is Improving
A higher credit score can often mean you will have access to access to a broader range of loan product and can secure more favourable terms.
This is especially true if your current loan has an interest rate higher than 20%.
Some of you may be shocked to read this, but if you have defaulted on credt in the past then a loan like this is not uncommon.
A bad credit car loan may take four years to repay, but your credit score may improve much sooner than that.
The benefits of refinancing could be significant!
If your score has improved since you entered your current auto finance contract then you should speak to our team of brokers to examine your options.
Your Finances Have Improved
Perhaps you have finished paying another loan elsewhere, or have secured a pay increase at work.
As your income improves you may also be eligible for a car loan with additional lenders.
The reason is that every lender also calculates your income, expenses, and liabilities in a slightly different way.
You may tick all the boxes with a lender, but if they assess your disposable income as lower than the required level to qualify for a loan you could be declined – leaving you with the next best option.
Refinancing is a very powerful and easy way to improve your outcomes as your income grows or your expenses decline!
Time to Refinance to Relieve Pressure
You’re Expenses Just Went Up!
If your expenses have increased and are expected to stay that way for some time then refinancing your loan to extend your loan term may be necessary.
This is going to cost you more over the long term as you will be paying interest for much longer than if you maintained your current loan.
However, sometimes other things must take priority.
You can reduce your repayments significantly by refinancing and resetting your loan term.
Balloon Payment is Looming
It could also make sense to refinance to avoid the balloon payment on your existing loan.
Not everyone can find the lump sum required to make these payments and refinancing into a new secured loan will allow you to spread out the payments.
This method of refinancing is often part of a customer’s intended strategy so they can maximise their borrowing power when buying the car in the first place.
However, this will cost you more over the long term.
When You Should NOT Refinance
There are times when a refinance will only make your situation worse and you should not consider doing so.
Early Repayment Fees Too High
If the exit fees on your current loan outweigh the benefit of refinancing then you should not do it. Even if the interest rate is lower.
If you combine the exit fees with the establishment fees on a new loan then the savings must be sufficient to offset these so that you are better off over the full term of the loan.
Low Loan Balance
If you are getting closer to repaying your loan in full then the time, effort, and savings on offer are likely too low to bother refinancing.
If your finances have improved you may be better off just plowing that extra cash into your loan to get the balance down sooner.
Just check those early repayment fees first!
Temporary Financial Difficulty
If you have hit a temporary problem, like illness, or a significant one-off bill that is placing a strain on your finances then refinancing could be unnecessary.
If you contact your lender you may be able to temporarily lower repayments, take a repayment holiday, or even enter a more formal hardship arrangement until you are back on your feet and can resume regular repayments.
Case Study: Let the Numbers Do the Talking
Here is a real-life scenario where we helped a customer refinance his loan. At first glance, it did not look like a good deal.
But when you look at the numbers and the customer’s objectives it would leave them in a better position over the life of the loan.
Scenario: Customer originally obtained a car loan via a car dealership at a 16% interest rate.
After one year of paying the loan, there was $59,418 still outstanding to be paid over four years.
A full summary of the deal is below:
| Loan Comparison | Previous Loan | Refinanced Loan |
|---|---|---|
| Principal Amount | $59,418 | $59,418 |
| Interest Rate | 16.0% | 10.1% |
| Early Repayment Fee | – | $750 |
| Application Fee | – | $750 |
| Broker Fee | – | $990 |
| New Loan Amount | – | $61,908 |
| Monthly Repayments | $1,683.92 | $1,573.12 |
| Total Cost | $21,410.29 | $13,601.84 |
| Total to be Repaid | $80,828.29 | $75,509.84 |
| SAVINGS | $5,318.45 |
By refinancing the borrower has saved $5,318.45 in costs over the life of the loan.
I think that it is important to note the $2,490 in fees the borrower paid to make the switch, and yes, this includes a broker fee.
This is the job of the broker to find you a deal that saves you money despite the costs associated with changing to a new car loan – and it is how we earn our money.
So if you are paying an interest rate you feel is too high, then get in touch today and we will try and find you a better deal so you can also save!
Can You Refinance Any Car Loan?
Loan Eligibility
A lender will consider factors like your credit score, income stability, employment category, and other existing debt when assessing your refinancing application.
As long as your situation has not deteriorated since your original application then you should be able to refinance.
Age and Type of Vehicle
Even if your financial situation has not deteriorated, your car definitely will have – even if you look after it.
Lenders often have strict criteria for the vehicles they will lend against.
Your car may have crossed one of these thresholds in the time you have owned it which could limit your refinancing options.
For an up-to-date assessment of your vehicle eligibility get in touch with the Gusto Team today!
How to Find the Best Car Loan Refinance Deals
You have two choices here. Shop around, or get in touch with a broker who can do the legwork for you.
Refinancing your car loan through a broker will often lead to a slightly higher loan balance in your new loan as there is usually a broker fee involved.
However, the work that a good broker can do will offset that cost while also saving you time and inconvenience!
The task for the broker is to find a deal that will save you money and/or meet your other refinance objectives to your satisfaction.
So it is a no-risk proposition for you with plenty to gain.
Conclusion
Refinancing your car loan can save you thousands of dollars over the life of the loan and is a relatively easy process.
You have to quantify the cost, calculate the savings, and make a decision on whether the change is worth the time and effort.
And remember, you can outsource most of that effort to Gusto Finance where our expert team of brokers will find you the most suitable deal to achieve your refinancing goals.
