You can refinance your car loan at any time, but should only do so if you save money or can better align your finances with specific personal goals.
How you time your refinance can determine the extent of the benefit you capture by doing so.
If you get his right you could save thousands of dollars (or thousands of headaches) over the life of your loan!
In this article, we’ll look at when you can refinance a car loan to maximise the benefit of doing so.
In This Post:
Why Refinance a Car Loan?
You should refinance a car loan if a change of lender leads to a better outcome for your situation.
This can mean different things to different people, but the most common reasons for refinancing are below.
- Lower costs
- Lower monthly repayments
- Repay your loan faster
- Paying out a balloon payment
- Lower fees
We discuss each of these scenarios in more detail in our complete guide to refinancing your car loan here.
How Soon Can You Refinance After Getting a Car Loan?
You can refinance a car loan the day after you get your new car if you really want to. But in most cases, this would leave you worse off!
Maximising the opportunity to refinance usually comes down to timing and circumstances.
Most car loans will have an early repayment fee if you close your loan too early in the loan term. This is to compensate the lender for the loss of future income associated with the original contract.
Refinance too late in your loan term and any cost savings may be eaten up by the exit fee you may have to pay.
Refinance too early and the loan options available to you may be no better, as your situation is largely the same.
The exception to that second scenario is if you have just entered an expensive loan that was a poor loan for your circumstances.
This can happen if you are not familiar with the auto finance market and you have been won over by a smooth-talking salesman.
This is one reason it can be worthwhile using a broker like Gusto Finance. We always make sure you are getting the most suitable deal for your situation.
If you would like an obligation-free review of your current loan click the button below and our expert team will be in touch.
What Could Prevent a Car Refinance
There are some issues that could prevent you from refinancing your car loan. These are more likely to be a problem early in your loan term.
Loan-to-Value Ratio Under Threshold
There are usually fees associated with your car loan such as an establishment or application fee, a broker fee, and in some cases a risk fee.
As a result, your day-one loan balance will be higher than the value of your car unless you have paid a significant deposit.
When you refinance you are going to incur some of these fees again.
If you have not paid down your principal balance then it is possible that your new loan balance will exceed the maximum loan size compared to the value of your vehicle.
Speaking of the asset value, cars are known as a depreciating asset – the value will decline year after year.
If the wear and tear on your car is worse than average then the depreciation could accelerate even further.
However, you will repay your loan at a much faster rate than the depreciation – assuming you look after the car – so you just have to give it some time.
Car Loan Refinance Eligibility
Every lender has a different credit policy that could affect your eligibility for the loan products of a particular lender.
For example, some lenders may not consider an application if you have made a certain number of credit applications within a specific timeframe.
If you apply to refinance your car loan within a few months of taking out the original loan then you may limit your options by triggering some of these eligibility requirements.
There are so many variations between lenders that it is hard to know who would be the most accommodating for your current circumstances.
Our brokers have access to over 40 lenders and have the industry knowledge to know exactly where you have the best chance of being approved for a good deal. So get in touch today!
When Is the Best Time to Refinance a Car Loan?
The best time to refinance your car loan is when you can capture the most benefit from doing so, that aligns with your goals.
Some of these are market-driven factors, and others are changing personal circumstances.
It is important that you understand where the opportunities are so that you do not miss out on the chance to improve your financial outcomes.
When Lower Cost Car Loans Are Available
The car loan market is very competitive and lenders are constantly tweaking their pricing based on a range of factors.
If interest rates have come down and your lender has held firm then there may be an opportunity for a cheaper loan elsewhere.
Your Credit Score Has Improved
Even if the market has stayed the same, you may be eligible for cheaper interest rates if your credit score has improved since you took out the loan.
Loan terms can be upwards of 5-7 years. If you meet all of your repayment obligations your score is likely to increase over this time frame.
As you become a lower-risk customer you may become eligible for cheaper loans and a switch could make sense.
Your Loan to Value Ratio is Acceptable
If you borrow the full purchase price of your new vehicle then it will take 12-18 months for your loan-to-value ratio to reach 100%.
Does that sound strange? Most are only familiar with LVRs in relation to mortgages where 80% is the norm, and anything higher is expensive and higher risk.
Auto finance is very different! Some lenders will accept an LVR of up to 180%.
So you may have good options sooner than you expected.
If the numbers stack up and you can save money by making the switch, then the sooner you do so the better!
Your Repayment Capacity Has Improved
Over the five-plus years it may take to repay your car loan you may find that your earnings increase considerably.
Your income is another factor that is critical to your loan assessment that (strangely) will be calculated differently between lenders.
Not all income types are treated the same. For example, if you work overtime or get paid regular bonuses you may find that one lender includes all of this in your income, another includes only half, and another may count zero!
So your options can change as you earn more. The more you earn the lower risk for the lender, which usually means lower-cost options are available.
You Want to Switch Lenders
Sometimes people need to change lenders for reasons other than the cost of the loan they are currently in.
Perhaps you have had a poor customer experience with your current lender.
Or a switch could be part of a broader restructuring of your finances. For example, you are taking out a home loan and the lender has offered you a sweet deal on your car loan if you also move this to the same lender.
Avoid a Balloon Payment
Some loan agreements include a lump sum payment due at the end of the repayment term, which is known as a balloon payment.
This final repayment could be upwards of $10,000!
Unless you have been diligently saving throughout the loan period you may need to also repay this amount over time.
If you refinance prior to the balloon due date then you can just spread those payments out over time.
Remove a Guarantor or Co-Borrower
If you used a guarantor when taking out a loan then perhaps that person has requested to be released from their obligations towards the loan.
This may require a refinance so that a lender can assess your capacity to be solely responsible for the loan.
It is also a good time to shop around for a better deal elsewhere, or perhaps you could just refinance with the same lender.
Conclusion
Refinancing your car loan is all about spotting an opportunity that will put you in a better position.
Now that you understand where these opportunities are, you are in a better position to determine when is the best time to refinance your car loan.
If you would prefer to leave the legwork of shopping around to the professionals, then submit an inquiry to Gusto Finance below and our team will get to work for you.
