How much could you save with a car loan refinance?

Yes, it is possible to refinance a car loan. Car refinancing is often about getting a better deal than your existing loan - one that offers a lower interest rate, reduced fees or different loan terms that better suit your needs. Refinancing could save you hundreds or even thousands of dollars, depending on how much you've borrowed.

Many Australians refinance car loans with new lenders, but refinancing with your current provider is also possible.

Refinancing a car loan in Australia is fairly straightforward, and involves a similar process to your initial car loan application.

Here’s how car loan refinancing works:

1. A borrower with an existing car loan applies for a new car loan of their choosing.
2. Once approved, they use that money to pay off the initial car loan with their current lender.
3. Finally, they start making repayments on the new loan.

There are many reasons why someone might refinance their car loan, especially if their financial situation and the Australian market has changed since they first took out the loan.

People might refinance their current car loan to:

Save money

Lower car loan interest rates or fees could mean more cash in your pocket, thanks to cheaper repayments. Additionally, if your credit score has improved since taking out your existing loan, you could access a more competitive rate.

Lengthen a car loan term

Extending your loan term could lower your repayments, as your loan balance will be divided between a greater number of months.

Manage a balloon payment

Sometimes dealer finance lets you enjoy lower monthly car loan repayments by adding a large balloon payment to the end of your loan term. Instead of paying your balloon all back in one go, refinancing your balloon may let you spread your payments out over a longer term.

Consolidate debt

Refinancing your car loan along with other loans or credit cards could allow you to keep all your debt in one place, offering you better control of your finances.

Remove a co-borrower

When you refinance a car loan, you'll have the option to remove a current co-borrower. If the co-borrower has a lower credit score than you, this could help you get a better interest rate. Keep in mind, there are other factors than just credit scores that also go towards determining your interest rate.

Get more bang for your buck

Refinancing a car loan could help you access more benefits than your existing loan, such as the flexibility to make extra repayments, or the option to redraw money when you need it.

Switch lenders

If, for whatever reason, you find it difficult to deal with your current lender, you may be able to switch to a new one that suits you better.

Depending on your lender, you may need to hold your current car loan for a minimum amount of time before you can consider refinancing. This can often be after around 6 months, though some lenders may be willing to consider refinancing your loan earlier.

Keep in mind that refinancing a car loan will involve a credit check. Refinancing too soon after applying for a car loan could risk lowering your credit score. 

You may also want to calculate the potential savings from refinancing your car loan over the remaining term, and compare these to the potential cost of fees when refinancing, to estimate if refinancing your car loan will be worth it.

Many banks and other car finance providers will want to know the value of your car before they’ll consider a refinance deal. 

If you’re refinancing a secured car loan, they’ll want to confirm that the value of the car (which often depreciates over time) is still enough to minimise their financial risk in case you default on your repayments and they need to repossess and sell the car. 

Even if you’re refinancing an unsecured car loan, the lender may still want to check the age, condition, and value of your car to get a better idea of the risk that your car could break down and be written off before the end of the loan term.

The potential savings from refinancing your car may depend on how your current and new loan differ in terms of their interest rates and ongoing fees. The amount it will cost you to exit the previous loan and establish the new one also comes into play here.

Your loan term can also affect how much you save over the life of the loan. For example, if you refinance your car loan three years into its five-year term, taking out a new loan on a two-year term would mean you’ll still be paying off your loan over a total of five years. On the other hand, if you were to switch to another five-year term, you'd be paying off your car for eight years in total. While this could lower your monthly repayments, it may also mean paying more in total interest charges over time, despite a lower interest rate.

Want to work out how much you could be saving on your monthly repayments by refinancing your car loan? Consider using our refinance car loan calculator: RateCity's Car Loan Switch & Save Calculator. All you have to do is enter the amount still owing on your existing car loan in the ‘I want to borrow’ field, along with the number of years remaining on your existing loan term and the interest rate offered by your preferred new loan provider.

Before you refinance a car loan, you should consider the exit fees you may incur for leaving your existing loan, and upfront fees for entering a new one.

How much you may be charged for leaving your loan early will differ from lender to lender. Some lenders waive exit fees in the last 12 months of the loan, so be sure to check your lender’s policies so you know what to expect.

It’s worth considering how close you are to the end of your loan term before refinancing. If you’re near the end, any money that you could save on interest or ongoing fees might be outweighed by the cost of establishing a new loan. Even if there’s potential to save a small amount of money, it’s worth considering if the time and effort of refinancing will make it a viable move for you.

You may be able to access more money by refinancing your car loan but it's worth considering the added costs that may be involved. The more money you borrow, and the longer you take to pay it off, the more the loan may cost you in total interest charges.

If you have a secured car loan, it may be harder to borrow extra money when refinancing your car loan, as your loan could end up too large to be comfortably secured by your car’s value.  

Some alternatives you could consider include:

• Credit card:Activating a credit card means you can pay for individual goods and services with borrowed money, instead of taking out a lump sum. Credit cards typically come with higher interest rates than car loans and personal loans, but may offer more flexibility.
• Personal loan: A personal loan allows you to access extra cash for you to use as you wish - whether that’s to consolidate a debt, go on a holiday or improve your home. When considering a personal loan, make sure you meet the eligibility criteria and understand the terms before you apply.
• No Interest Loans Scheme (NILS):This scheme offers people on low incomes access to credit (usually up to $1500) for essential goods and services.
• Financial counselling: Financial counsellors can provide advice and support when it comes to bills and debt. Chatting to a counsellor could help you manage your savings and pay off your debts quicker.

The factors to consider when refinancing a car are like when taking out a car loan for the first time. They include:

• Interest rate: This may be set at a fixed rate that keeps car loan repayments consistent, or a variable rate that has the potential to rise or fall as the market changes.
• Comparison rate: This is an estimate of your car loan's overall cost, including interest charges and standard fees.
• Fees: Charged at the lender’s discretion, these commonly include upfront application fees, establishment fees and early repayment fees. You may find that you need to pay fees to use certain features, such as a redraw facility or paying off the loan early.
• Security:Secured car loans use the car's value to guarantee the loan, which can mean lower interest rates. Unsecured car loans may be more flexible; however, their interest rates are usually higher.
• Loan term: This is the length of time you have to pay back your loan. While extending your loan term can lower individual repayments, it can also increase the total amount you pay in interest charges as you are paying down the loan’s balance at a slower rate.
• Additional repayments: Some lenders let you pay extra onto your loan when you can afford it, which can reduce interest and bring you closer to exiting the loan early.
• Redraw facility: Car loans that let you make additional repayments may also let you redraw money from your loan when you're ahead on your repayments, which can come in handy if you need some extra cash.

Here are seven steps to help you refinance to the best car loan for your needs:

1. Compare your loan options: You can narrow down your search with the filters on RateCity's car loan comparison tables.
2. Do your calculations: RateCity's Car Loan Switch & Save Calculator can provide you with a repayment estimate for your preferred loan products, making it easy to compare against your current repayments.
3. Check your eligibility and fees: It’s important to make sure you meet your new car loan’s eligibility criteria, and are aware of all the upfront and ongoing fees and charges before you apply.
4. Check your credit score:Your credit score may have changed since taking out your existing loan, so it may be a good idea to check if you might be able to access a more competitive rate.
5. Prepare your application:  At this stage, you'll need to submit relevant documentation and information - this usually includes details about your current lender and your car, including its age.
6. Await approval: Once you've submitted all the necessary information, you’ll have to wait for a response from the lender, which may take a few hours or a few days.
7. Pay off your old loan and begin paying your new loan: Once the loan has been approved and the funds are in your account, the final step is to pay off your old loan (this will be up to you or the lender) and then begin making payments on your new one.

Much like applying for your initial car loan, you’ll need to complete some paperwork to refinance a car loan. 

Different lenders may have different requirements, but some of the common documents you may need include:

• Your driver’s licence: to confirm your identity and address
• Recent payslips: to confirm your income
• Bank statements: to confirm your savings
• Loan statements: details of any other loans, personal loans, credit cards or home loans you already have in your name
• Vehicle registration: to confirm the car’s history, and its value if you’re refinancing a secured car loan
• Car insurance: some lenders may require you have a comprehensive car insurance policy in place

Refinancing your car loan shouldn’t greatly affect your credit score. That said, applying for a car loan involves a credit check, which is recorded in your credit history. Making too many credit applications over a short span of time could potentially lower your credit score, as the multiple credit checks could indicate to lenders that you’re struggling to manage money.

You can check your current credit score without affecting it with a free credit report from RateCity.