Can I refinance my car loan?

When it comes to your personal finances, it’s not a bad idea to keep an eye out for better offers on financial products that could potentially save you money.

Even if you were thrilled with the deal you got when you initially signed up for a certain product, there’s every chance circumstances may have since changed such as your income, the market or perhaps your credit score, meaning there could be even more competitive options available to you now.

Many Australian mortgage holders regularly compare home loan products to see whether refinancing could be beneficial to them.

But is it possible to refinance a car loan?

Simply put, yes, it is. However, there can be restrictions that prevent some borrowers from doing so. And even if you are eligible, there are still a number of factors to weigh up before making the move.

When should I consider refinancing my car loan?

There are a number of circumstances in which it might be a good idea for you to consider refinancing your car loan. Some of these include the following scenarios.

Interest rates have lowered

Depending on the state of the market, there’s a chance that there are now finance options with more competitive interest rates than your current loan. If the difference is significant enough, it could pay off to refinance to a loan with a lower interest rate, particularly if you are in the earlier stages of your car loan.

Your credit score has improved

If your credit behaviour has markedly improved since you first signed up for your car loan, your credit score could have also seen a boost. This might mean that more desirable car finance options are now available to you, with lower interest rates, better terms and conditions, more flexibility, or all of the above.

You want to reduce your loan term

A change in your financial situation, like a pay raise for example, could mean that you are able to afford higher repayments than you initially signed up for. Making higher repayments towards the same loan amount generally means you could pay off your loan faster.

However, your current loan may not allow for extra repayments, or there could be significant fees involved. If this is the case, you could consider refinancing to a loan with shorter terms and/or more flexible repayment features.

If this is something that you can comfortably afford, paying your loan off sooner can also save you money on interest charges over the life of the loan.

You want to extend your loan term

There can come a time where a blow to your financial circumstances may occur, such as a redundancy or unpredictable expenses, leaving you in a position where you are finding it difficult to meet your loan repayments. In this instance, lengthening your loan term could allow you to reduce your repayments to a more manageable amount.

It’s important to remember that while this may help with affordability in the short term, if you do extend your loan term, you could likely end up paying more in interest charges over the life of the loan.

Your current loan charges high ongoing fees

Some car loans have certain ongoing fees and charges such as monthly fees, missed payment penalties and redraw activation fees.

If the fees from your current loan seem to be adding up month after month, it could be worthwhile comparing these costs with those involved with refinancing to see whether it might pay to make the switch.

When should I avoid refinancing my car loan?

It’s not always going to be possible, or beneficial, to refinance your car loan. Some of the circumstances that might make this the case include the following.

You’re close to the end of your loan term

If you’ve only got a short amount of time left on your current loan term, you may find that any money that you could potentially save on interest charges or ongoing fees might be outweighed by the costs associated with applying for a new loan.

Even if you still stand to save a small amount, it’s a good idea to weigh that up with the time and effort it could take to refinance to a new loan to decide whether it’s truly worth it for you.

The value of your car is less than what you still owe on your loan

It’s fairly common knowledge that your car will depreciate in value over time. If you’re a few years into your current loan term and the value of your car is deemed to be less than what is still owing on your car loan, there’s a good chance a new lender may not approve your application for a loan. The main reason being that the lender could determine the loan too big a risk, as if you were to default on your loan, they would likely be unable to recoup the costs simply by selling the vehicle.

Consider doing your research and reaching out to potential lenders before submitting an application in order to minimise the risk of it being declined.

The cost in time and fees outweighs any potential savings

Refinancing your car loan will generally involve some kind of upfront fee payable to the new lender, in order to establish the new loan. On top of this, you may be charged an early exit penalty for ending your current loan prior to the contracted term. These costs, along with any other fees and charges that may arise, should be factored in when calculating any potential savings you hope to make by refinancing your car loan.

It’s also worth considering how much time and effort it will take you to refinance before making your decision to do so.

You want to prioritise your credit score

Regularly applying for new finance does have the potential to negatively affect your credit score. If, for instance, you have plans to apply for a mortgage in the not too distant future, you may consider holding off on refinancing your car loan for the sake of prioritising a much bigger financial commitment.

For advice specific to your personal financial circumstances, consider talking to a financial advisor.

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