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
Crunch the numbers to see how much you could be paying
Your estimated repayments
$98.62
| Total interest paid: | Total amount to pay: |
| $1233.43 | $5,143.99 |
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 costs vs the savings
Perhaps the most important factor to consider is the cost. Locking in a lower rate and fees is all
well and good, but it counts for nought if your current lender slugs you with steep break fees. Run
the numbers before you take the plunge. -
Your vehicle's value
It’s also important to think about how valuable your car is, particularly in contrast to your
outstanding loan balance. If its value is lower than your balance, it might not be the best time to
refinance to help you avoid paying up to cover the difference. -
Your credit file
If you used your car loan in part to improve your credit score, you may be able to reap the rewards
by refinancing. However, if you’ve made late payments or had issues in other areas, you may be
better off savings yourself from copping a higher rate. -
The time left on your loan
Knowing the right time to refinance is a delicate balancing act. 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. -
Your reason for refinancing
Think carefully about why you’re looking to refinance. Something that brings with it a clear and
distinct benefit may be worth pressing on with, but a minor convenience ultimately may not be enough
to up-end your current loan.
The Savvy refinancing process explained
-
Submit your online application to Savvy
Firstly, tell us about yourself and the car loan you’re after. This will include information about your
earnings, employment and current credit situation. You can also tell us about your car’s age. -
Supply any required documentation
We may require you to submit additional documents to help verify your details. This can be done online,
where you’ll also be able to electronically sign other necessary documents such as your consent form. -
Review your options with your Savvy consultant
Once we have all this information, we’ll compare offers based on your profile. Your consultant will be in
touch after they’ve done this to talk through the best car loan available and your indicative interest
rate. -
Have your application prepared and approved
Your consultant will prepare your formal application for submission, with approval possible as soon as 24
hours after. Once you’ve signed everything, we’ll organise the settlement of your new loan. -
Pay off your old car loan
After everything has been signed off on, your existing car loan can be paid off by your new loan. This
can either be done by you or your lender directly (though this will depend on the lender you apply
with).
The pros and cons of refinancing your car loan
Pros
-
Take advantage of lower rates
If your credit score has increased while repaying your loan, or if rates have fallen during
your term, you can potentially take advantage of lower interest for future repayments. -
Adjust your term to meet your needs
You can adjust the loan term to better suit your financial situation and goals, whether
you're looking to spread it out to give yourself more breathing room or shorten it to pay
less interest overall. -
Switch to a new lender
If you're dissatisfied with your current lender's customer service, online features or
interest rates, refinancing allows you to shop around and find one that better meets your
needs. -
Access new features
If you want more freedom to make additional repayments each month or redraw some of your
funds when you need them, switching to a new loan could help you do just that. -
Remove a co-borrower or guarantor
You may have signed up with a co-borrower or guarantor initially to boost your approval
chances, but with a few years under your belt, refinancing allows you to remove them from
the agreement.
Cons
-
Fees may outweigh the benefits
It’s important to be mindful of whether there are any early exit fees with your current car
loan or application fees with the new one that negate the benefits of refinancing in the
first place. -
Potential for more interest
While refinancing your car loan can potentially lower your interest rate, you may end up
paying more interest if your credit score has fallen or you decide to lengthen your loan
term. -
Risk of negative equity
Negative equity occurs if the car has depreciated at a faster rate than your loan balance has
decreased. If you refinance a car with negative equity, your new lender may not be willing
to offer the full balance of your outstanding debt, leaving you to cover the shortfall.
