You’ve probably heard of mortgage refinancing, but you might not realise you can do the same with your car loan. In simple terms, this is the process of switching your current car finance deal to a new one with the same lender or (more commonly) a different provider.
There are plenty of reasons why someone might want to refinance their car loan, from scoring a lower rate to adding or removing other features from their current package. Regardless, there’s plenty to go over before you take the plunge and initiate the switch.
Why might someone refinance their car loan?
As mentioned, car loan refinancing can happen for several reasons, including:
- To secure a better rate: you might look to do this if interest rates have fallen or your financial position has improved over the course of your term to date.
- To reduce your loan fees: in the same way, switching to a new loan with low or no fees could make your life easier.
- To change the length of your loan term: if your budget is tighter now, you may want to stretch your term back out to reduce your repayments. This increases the cost of your loan, though. Alternatively, if you’re in a better position now to pay it off sooner, you may look to refinance to a shorter loan term.
- To remove a co-borrower or guarantor: many applicants sign up initially with another borrower or a guarantor, which can improve your approval chances. Refinancing is the only real way to remove them.
- To add a residual payment: by adding a residual or balloon payment, you’ll decrease your monthly repayments, but your interest bill will go up (and you’ll have to pay a lump sum at the end of the loan).
- To access new features: you may simply be looking to add features like free additional payments, a redraw facility or something else to your loan that you don’t have.
How much can I save by refinancing my car loan?
The amount you can save 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. | $630 | $19,669 | $4,790 | N/A | $630 | $7,803 | N/A |
| 9.50% p.a. | $630 | $19,669 | $4,790 | 9.00% p.a. | $625 | $7,638 | $165 |
| 9.50% p.a. | $630 | $19,669 | $4,790 | 8.50% p.a. | $621 | $7,474 | $330 |
| 9.50% p.a. | $630 | $19,669 | $4,790 | 7.75% p.a. | $614 | $7,229 | $575 |
| 9.50% p.a. | $630 | $19,669 | $4,790 | 7.00% p.a. | $607 | $6,985 | $818 |
| Calculations based on a $30,000, five-year car loan repaid monthly. | |||||||
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 |
|---|---|---|---|---|---|---|
| 5 years | $19,325 | $3,753 | N/A | $601 | $6,068 | N/A |
| 5 years | $19,325 | $3,753 | 4 years | $870 | $5,299 | $770 |
| 5 years | $19,325 | $3,753 | 3 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. | ||||||
As you can see, refinancing from one car loan to another can bring with it significant financial benefits, both in terms of slashing your interest bill and clearing your debts sooner. Of course, as mentioned, you won’t be saving on your loan as a whole if you decide to extend your term, but you’ll be more comfortable month to month.
Following on from the above table, extending your loan term to seven years in total after two years of repayments would slash your repayments to $387 per month, but your interest bill would spike to $7,662, almost $1,600 more than your original loan deal.
Many lenders will charge break fees for ending your agreement early. This means that you could end up paying hundreds to exit your current contract, potentially negating a big chunk of the financial benefit of doing so.
If you want to run the numbers yourself, our easy-to-use car loan repayment calculator allows you to do just that.
Case study: To refinance or not to refinance?
Harriet is 12 months into her five-year car loan term. She purchased her 2015 Honda Civic in a private sale for $15,000 while she was still at university and working casually. Fast forward to today, though, and she’s completed her degree and has been working full-time for the last nine months at the same place.
Because of this, she not only wants to pay off her loan much more quickly but also believes that she’ll qualify for a better interest rate now that she earns more and has greater job stability. She crunches the numbers on her current loan to see how much switching to a new deal could save her:
| Interest rate | Repayments | Balance after one year | Refinanced loan term | Refinanced rate | New repayments | Total interest | Total saving |
|---|---|---|---|---|---|---|---|
| 12.50% p.a. | $337 | $12,696 | N/A | N/A | $337 | $5,248 | N/A |
| 12.50% p.a. | $337 | $12,696 | 3 years | 10.00% p.a. | $583 | $3,111 | $2,138 |
Because she qualifies for a very decent rate discount based on her new job, as well as having covered the first 12 months of the loan without issue, Harriet stands to save well over $2,100 by switching to a shorter loan term.
The other factor to consider is that Harriet’s lender charges an early termination fee of $750 for loans paid out in the first two years of their term, reducing her savings to $1,388. Still, that’s enough for her to bite the bullet and switch to a new loan.
What to consider before you refinance your car loan
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Your reason for refinancing
Think carefully about why you’re looking to refinance to determine if it’s worth your time. Is it something that offers a clear benefit, or is it a result of a minor convenience?
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Your vehicle's value
If your car’s value is lower than your outstanding loan balance, it might not be the best time to refinance. Switching to a new loan would force you to cover the difference out of pocket.
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Your credit file
If your credit score has improved, you may be able to reap the rewards by refinancing. However, if you’ve had issues in other areas, you may be better off riding out your current loan.
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How much you’ll really be saving
Locking in a lower rate and fees is all well and good, but it counts for nothing if your current lender slugs you with steep break fees. Run the numbers before you take the plunge.
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The time left on your loan
If you make the switch early in the piece, you stand to gain more but could stump up more in break fees. If you leave it too late, it might not be worth the trouble.
How to refinance your car loan with Savvy
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Submit your application online
Tell us about yourself, including your financial situation, how much you need to borrow and your proposed new loan term.
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Send through your documents
We’ll need to verify your identity and finances, which can be done online via our simple portal.
- Have a chat to your Savvy broker
Your broker will give you a call to discuss the best options available to you and what the next steps may be.
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Have your application prepped and submitted
Once you give us the all-clear, your broker will put together your application to submit to your lender.
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Receive formal approval
If your lender is satisfied with the application, they’ll formally approve it, which your broker will keep you updated on.
- Settle your new loan and pay out your old one
We’ll handle the settlement of the loan, so all you’ll need to do is sign your contracts and the funds can be sent to your previous lender.
