Written by Car loan refinancing is the process of switching your current car loan to a new one, which can either be a different or updated product with the same lender or a fresh loan with a new lender. Essentially, you’re taking out a new car loan to pay out your old one and continuing your repayments on a different set of terms.
For this reason, refinancing may be treated as a new application. For instance, if you originally took out a $50,000, five-year car loan and are looking to refinance it after two years with $20,000 paid off, you’ll effectively be applying for a three-year, $30,000 loan.
By applying through Savvy, you’ll be able to speak to one of our experienced consultants. They’ll walk you through the process, as well as the potential benefits and drawbacks of refinancing your loan.
Why should I refinance my car loan?
There are many reasons why someone might look to refinance their car loan and access a new deal. Some of the main reasons why you might look to do so include:
- To lock in a better interest rate: if the market has taken a turn towards lower interest rates or your financial position (such as your credit score) has improved over the course of your loan term, you may be eligible for a lower interest rate to help you save.
- To reduce your fees: in the same way, some lenders may offer lower fees than what you’re currently paying, so you may look to switch away from having to fork out in this area.
- To increase the length of your loan term: because your circumstances may have changed since you took out your loan, some people may opt to change their term. If your budget is tighter now, you may look to stretch your loan term out to reduce the monthly cost (which increases your overall loan cost).
- To shorten your loan term: alternatively, if you’re in a better position now to pay off your loan sooner, you may look to refinance to a shorter term.
- To remove or add a co-borrower or guarantor: if you signed up for your loan initially with another borrower on the contract or a guarantor, the only real way to remove them is to take out a new loan with fresh terms. On the flip side, adding either of these to your loan will also require a refinance.
- To add a residual payment: some lenders will give you the option to add a residual, or balloon, payment when taking out your loan. This is a lump sum to be paid at the conclusion of your agreement and adding one can reduce the cost of your ongoing repayments (though they increase the interest you pay overall).
- To access new features: you may simply wish to refinance your loan so you can gain access to new and improved features which aren’t included in your current deal. This may be free additional payments, a redraw facility or anything else.
How much can I save by refinancing my car loan?
The amount you can save by refinancing your car loan will depend on a range of factors, including the interest and fees, loan term, loan amount and balloon (if applicable). The following table shows how refinancing your loan to one with a lower rate can help you save:
| Interest rate | Repayments | Balance after two years | Interest after two years | Refinanced rate | New repayments | Total interest | Total saving |
|---|---|---|---|---|---|---|---|
| 9.50% p.a. | $631 | $19,669 | $4,791 | 9.00% p.a. | $626 | $7,639 | $166 |
| 9.50% p.a. | $631 | $19,669 | $4,791 | 8.50% p.a. | $621 | $7,474 | $331 |
| 9.50% p.a. | $631 | $19,669 | $4,791 | 7.00% p.a. | $608 | $6,985 | $819 |
Calculations based on a $30,000 car loan repaid monthly over five years.
Additionally, shortening your term can have a major impact on the cost of your loan. Here’s how it works:
| Loan term | Balance after two years | Interest after two years | Refinanced term | New repayments | Total interest | Total saving |
|---|---|---|---|---|---|---|
| Five years | $19,326 | $3,753 | N/A | $602 | $6,069 | N/A |
| Five years | $19,326 | $3,753 | Four years | $870 | $5,299 | $770 |
| Five years | $19,326 | $3,753 | Three years | $1,677 | $4,547 | $1,522 |
Calculations based on a $30,000 car loan repaid monthly with a 7.50% p.a. interest rate.
However, it’s important to note that many lenders will charge break fees for ending your agreement early. This means that you could end up paying hundreds to exit your contract ahead of schedule and take up your new one, which could reduce or eliminate the benefit of refinancing in the first place. It’s important to check with your lender to see whether they charge early exit fees and how much they may cost you.
Car Loan Repayment Calculator
Will I have to pay a fee to refinance my car loan?
Many lenders will charge break fees for ending your agreement early. This means that you could end up paying hundreds or more to exit your contract ahead of schedule and take up your new one, which could reduce or eliminate the benefit of refinancing in the first place.
The amount you’ll be charged can vary based on the length of your loan and how long there is to go, as well as your fixed interest rate. It’s important to consider these when calculating the benefits of refinancing, as you can see in the table below:
| Interest rate | Repayments | Balance after two years | Interest after two years | Refinanced rate | New repayments | Total interest | Total saving | Estimated break fee | Total loss |
|---|---|---|---|---|---|---|---|---|---|
| 9.50% p.a. | $631 | $19,669 | $4,791 | 9.00% p.a. | $626 | $7,639 | $166 | $300 | $134 |
| 9.50% p.a. | $631 | $19,669 | $4,791 | 8.50% p.a. | $621 | $7,474 | $331 | $600 | $287 |
| 9.50% p.a. | $631 | $19,669 | $4,791 | 7.00% p.a. | $608 | $6,985 | $819 | $1,500 | $681 |
Calculations based on a $30,000 car loan repaid monthly over five years. Break fees are estimates only and not necessarily representative of what you may be charged for refinancing your loan.
However, not all lenders charge these fees, so it’s worth checking to see whether yours charges early exit fees and how much refinancing may cost you. Car loans with variable interest rates, though not as common as those with fixed rates, are less likely to come with early repayment fees.
Can I refinance my car loan if I have bad credit?
You may be able to refinance a car loan with bad credit, but whether you can do so will depend on a range of variables, such as your credit score, repayment history and the lender you’re applying with. Showing your lender the following will maximise your chances of approval:
- You’ve consistently made repayments on time and in full across your car loan term
- You’ve paid down or eliminated other bad debts
- You’ve maintained consistent recent employment and income, as well as a stable residential history
Applicants who can prove these will fit into the “correctable credit” category, which will make approval more likely. However, if your credit score has dropped since you took out your car loan, refinancing may be more difficult and will likely cost you more money in the long run in break fees, increased interest and other charges.
Things to think about before you refinance your car loan
The Savvy refinancing process explained
The pros and cons of refinancing your car loan
Common car loan refinancing questions
In theory, you can refinance your car loan soon after you take it out. However, attempting to do so will mean you have multiple enquiries on your credit file in quick succession, which may make it more difficult to get approved. When refinancing, it’s worth determining when the most beneficial time to switch your loan may be.
Yes – by applying with Savvy, we can help you switch your car loan from one with a fixed rate to a new one with a variable rate. Speak with your consultant about your options if you’re looking for a variable rate car loan.
No – you won't be required to pay a deposit as part of your car loan unless specifically requested by the lender. This may be because your new lender has different criteria or your financial situation has changed since you took out your loan. However, this won't be necessary in most cases. Speak with your Savvy consultant if you're unsure.
We’re partnered with lenders who can help finance cars as old as 20, while others may not impose an age limit at all (provided your car meets their qualification criteria).
Depending on the terms of your agreement with your lender, you may be able to trade in your vehicle with finance owing on it. For instance, you may have the option to use the funds from your sale to pay off the rest of your loan.
If you’re trading your car in for another one, you may be able to refinance to switch your loan’s security to your new vehicle instead. You can speak with your Savvy consultant about what your options may be today.
The amount you can save will depend on a range of factors, such as the size of your loan, difference in interest rates, length of your term and more. You can use tools such as a car loan repayment calculator to help you work out how much you may save in your particular instance. Your Savvy consultant will also help you work out what your savings may be when you apply with us.
Your lender may not require you to resubmit all your documents if you’re applying for a car loan refinance. For example, they’ll likely already have your photo ID on file. You may need to send through your financials again to verify that your income and employment are still sufficient to cover your repayments.
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