6 Things to Consider Before Refinancing Your Car Loan

Refinancing looks tempting when your credit score improves or market interest rates drop.

You can reduce the cost of your car loan, secure lower repayments, or just pay it off sooner and be debt free. 

But this is a new loan contract and there are extra costs involved that could wipe out any benefits if you are not careful.

In this article, we will cover all things you should consider before refinancing your car loan to make sure you come out ahead. 

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Key Takeaways: Refinance Considerations

Define Your Refinance Objective	Decide if you want lower monthly payments (by extending the term) or less total interest (by getting a lower rate). These goals often conflict.
Calculate Switching Costs	Consider any exit fees from your old lender and the establishment fees for the new loan. If these exceed your interest savings, don’t switch.
Security Eligiblity	To refinance your car must qualify as security with the new lender and must be within age, odometer, and value criteria.
Shop Around for Best Refinance Option	Whether you want to lower repayments or save money, you must shop around (or use a broker) to maximise the benefit from the refinance.

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Refinancing Events

It makes the most sense to refinance your car loan in the first half of your repayment term. 

The benefits of a cheaper car loan compound the sooner you make the switch.

So you should look out for personal, or market driven, events that allow you to access better auto finance options. 

These can include: 

• Lower rates are available in the market.
• Your credit score has improved. 
• Your loan-to-value ratio has reduced. 
• Repayment capacity has improved. 
• You have a problem with your current lender.
• Avoiding a balloon payment. 

These are the most common scenarios when it makes sense to refinance. 

Steps to take Before Refinancing

There is some legwork involved if you want to switch to a cheaper car loan yourself. 

Follow each step below to ensure that the time and effort is worthwhile. 

The alternative, is to contact our expert team and we’ll do the calculations for you.

Click below to get started. 

1. Identify Your Primary Refinance Goal

You need to be clear on what you are trying to achieve by refinancing so you know what to look for in the market. 

Refinancing typically targets one of four goals:

• Lower overall cost
• Lower monthly repayments
• Repay your loan faster
• Paying out a balloon payment
• Lower fees

There are trade offs here. If you extend your repayment term then it will lower your repayments, but may cost more overall. 

This could be offset by a cheaper interest rate. 

There are a lot of variables which is why you must be clear on your end game.

2. Calculate All Switching Costs

You will need to request a payout figure from your existing lender. This will include any exit fees that may be payable.  

This number is your starting point that you need to finance elsewhere, unless you are also contributing cash savings.

You will then need to have a quote for your refinance that includes all establishment fees, risk fees (if applicable) and broker fees. 

The total amount owed will increase after refinancing. 

But as long as you are moving to a sufficiently cheaper loan then you will save money over time. 

3. Compare Total Costs

Now you have quantified the cost of switching, you can compare this to just staying with your current lender and seeing out the repayment term. 

If you come out ahead, and your objective is to save money, then you should proceed. 

This may be less relevant if your main objective is the lowest repayment possible. 

But you should still understand what it will cost you before proceeding with the refinance. 

4. Your Vehicle Equity Position

Refinance applications can fail because the loan balance exceeds the car’s current value by too much. 

Auto lenders generally lend more than 100% of the car’s value, but there is a limit that varies between lenders. 

How to make a quick assessment: 

• Get your official payout figure from your current lender.
• Compare it against a conservative trade-in value on Redbook or Carsales.
• Calculate your new loan amount divided by the value of the car. 
• Check with your new lender if that ratio is below their threshold.

5. Check the Vehicle Qualifies for Security

Most people only check if their car is eligible for finance today. 

However, most lenders assess risk based on the vehicle’s age at the end of the new loan term.

They need to ensure the asset holds enough value to secure the debt until the final payment is made.

Check these factors before applying:

• Future Age of vehicle: A 5-year term on a 7-year-old car results in a 12-year-old asset. Many lenders cap this age strictly (12-15 years max).
• Odometer: High kilometres drastically reduce book value and limit lender options.

6. Shop Around for the Best Refinance Option

Despite the extra fees involved you can save thousands of dollars by refinancing your car loan. 

But you need to be sure that you have secured the best refinance deal possible.

While it is possible to navigate all of these steps yourself, they sound quite daunting for those new to the process. 

However, a good broker has access to car valuation tools, lender policies, and a broad panel of lender options. 

They can check your profile against 50+ lenders in seconds to ensure you have the best option for your situation. 

Frequently Asked Questions

Your Final Refinance Decision

A car loan is a long term commitment and your financial circumstances can change a lot over a 5-7 year period. 

By proactively seeking the best finance options on the market you can save thousands of dollars, or pay off your loan much sooner. 

It takes a little legwork, but you can shortcut that significantly by getting our team to work on your behalf.