Refinancing a car loan | Your complete Guide

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Updated On October 15th, 2022By Dynamoney

Refinancing a car loan…why you should?

Did you know that refinancing your car loan is often overlooked as a potential way to save money? Even though most car loan periods typically range from 2 to 7 years there are still opportunities to put money back into your account.

If you are stuck with a high interest rate car loan or taking out a high-cost loan from either the dealership or another lender, or your current loan is simply no longer meeting your needs, then car loan refinancing could be a viable option to explore.

Below you will find all you need to know when it comes to refinancing a car loan.

How does refinancing car loans work?

When refinancing your car loan, the new lender will pay off your current lender once you have been approved for the new loan. You will then be required to pay back the loan from the new lender according to the terms of the new contract, which ideally should be more affordable and better suited to your needs.

When is refinancing a car loan a good idea?

If you are looking to reduce your car loan repayments

Refinancing your car loan to a new loan with a lower interest rate can reduce your weekly, fortnightly or monthly repayments, which will save you money in the long term.

If your credit score has improved

As you may or may not know a bad credit score has a huge impact on how high your interest rate will be. In the event your credit score has improved since you first took out your loan you might be eligible for a lower interest rate, which could save you thousands.

If you are unsure what your credit score is, you can easily access a free credit report every twelve months from any of the major credit reporting agencies in Australia, such as Equifax.

Your current car loan no longer suits your requirements

If your current car loan is no longer suitable for your needs it is worth looking into another option that comes with extra, more suitable features such as the ability to make extra or more frequent repayments, allowing you to pay off your loan faster.

When you want to reduce the term of your loan

You might now be in a better place financially and want to make extra repayments to get ahead of your debt. If your current car loan doesn’t allow you to make extra repayments or charges significant fees to do so, then refinancing your car loan could be a good option.

When you want to extend your loan term

On the flip side, if you wish to extend the length of your loan term then it can make sense to refinance your car loan to one that allows a longer loan period. It is good to keep in mind that depending on the terms of the new loan this option may not save you money in the long run.

When not to refinance a car loan

When your car is worth less than what you currently own on your loan

If your car is worth less than the amount left owing on your car loan refinancing can be difficult as most lenders will see your situation as high risk, as it is likely they won’t be able to cover costs if you default on your loan and they need to sell the vehicle.

Your loan term is almost finished

If you are almost at the end of your loan term often the costs associated with refinancing will outweigh any potential savings.

Entry and exit fees are high and outweigh the potential savings

When it comes to refinancing car loans, there are costs involved ranging from break fees to exit fees and application fees. If you only have a short period of time left on your loan term, it may cost you more money in fees to refinance and therefore it would be more advantageous to remain with your current lender.

How to refinance a car loan

Step one: Contact your current lender

Find out how much you owe on your existing car loan. If you are behind in payments, make sure you catch up as soon as possible. Also find out at the same time if you were to request to exit the loan if you would be required to pay any exit fees and if so, what they would be.

Step two: Shop around for new car loans

Shop around and compare different options from several banks and non-bank lenders to see if there are more competitive options compared to your existing car loan.

Step three: Find out if you would need to pay entry/loan establishment fees

It is a good idea to find out how much you will be required to pay in establishment fees if you choose to refinance your car loan. Once you have established the costs involved, you will be able to determine if it is a good idea to enter a new car loan or to pay out the remainder of your current loan.

Step four: Work out how much your new car loan will cost

Check out Dynamoney’s car loan calculator to figure out if your new car loan will work out cheaper overall. Make sure you factor in all entry and exit fees to ensure you get an accurate cost breakdown.

Step five: Apply for a new car loan

Once you have decided that a new car loan is a better overall option, the final step is to apply for the loan you have selected. Be sure to gather your proof of identity and all supporting loan documentation at the start, to ensure a smooth and timely process. As part of the changeover, your new lender will pay out your current lender.

Pros and cons of refinancing car loans

Pros

Refinancing your car loan gives you the ability to change the type of loan you have. For example, you could opt to change from secured to unsecured or fixed to variable interest rates.
You could potentially have the option to add a balloon payment to your new loan. This can help reduce your repayment amounts.
Refinancing your car loan can afford you the ability to increase your loan term if you would like to reduce the cost of your repayments.
A new loan could offer you more competitive interest rates, thus reducing your repayments and total interest payable.
You could save money and reduce the interest you pay by refinancing your current loan.
If you want to add or remove a co-signee from the loan it can often get you a better interest rate, if you have a bad credit score.
Car loan refinancing may make you eligible for a new car if you are willing to trade in your current one. One common way of refinancing a car loan is to pay out the existing loan with a trade-in.

Cons

If you choose to extend the length of your loan term you might end up paying more interest.
Selecting a variable interest rate loan can make it more difficult to budget if interest rates fluctuate.
Depending on the total cost of entry and exit fees you might end up paying more overall.
Refinancing a car loan can be a time-consuming exercise as you will need to compare lenders and rates, as well as apply for a new loan.

Refinancing car loan FAQs

Do I still need to get all my documents together for car loan refinance, as I did originally?

Yes, because you are taking out a new loan your new lender will need to conduct a credit and identity check and look at your bank statements, payslips and payment history.

If I only just signed my current car loan, can I refinance to a new car loan?

If you have just taken out a new car loan within the last year or two it is not advisable to refinance your car loan. Each new application will require a credit check, regular credit checks can damage your credit score, which will in turn affect any potential savings. Ideally, a credit check should only be carried out once a year or less.

I have a bad credit car loan, but my credit score has improved. Can I refinance?

Yes, if your credit score has improved it can be worthwhile to refinance, as you could very well be offered a more competitive interest rate, dependent on your situation, which can save you money.

Is it worth refinancing my car loan?

When considering car loan refinance, you need to look at the reasons why you are wanting to refinance and if it is going to work out more cost-effective overall. To find out more regarding refinancing your loan with Dynamoney, contact one of our team today.