Time to read : 6 Minutes
Refinancing your car loan might seem like a smart way to reduce your interest rates, but there are lots of things to consider before you trade existing car finance for another loan. And as interest rates continue to rise, it may not be the best option.
By being clear on your reasons for thinking about refinancing, you can make a more informed decision to help you make up your mind about whether refinancing your car really is worth it.
Some reasons why refinancing your car loan might be a good move may include:
switching lenders
saving money
borrowing more money
Accessing improved loan features.
Refinancing may cost you more
According to data analysis from our Compare Club specialists, the current economic conditions are adverse for rates and, in a lot of cases, the interest rates on a refinanced loan may even go up.
By focusing on refinancing as a mechanism to reduce financial strain on cash flow, you may not get a fantastic interest rate but you could end up with more money in your pocket every day, by pushing out the term of the loan and spreading the repayment amounts still owing over a longer period.
And if you’re struggling with rising mortgage rates, as well as the sting of price hikes at the petrol pump and supermarket checkout, that relief might just be the breathing space your household budget needs.
But like any financial decision, having access to clear, accurate information is always important. When it comes to signing loan documents that will have a direct – and potentially lengthy – impact on your ongoing expenses, it’s vital that you understand what it means for you, and if it’s sustainable and manageable.
To help you understand if refinancing your car loan is worth it, the answers to the following questions may help.
How can you refinance a car loan?
Compare your options – and talk to a preferred lender
By familiarising yourself with your current loan term and repayments, you can compare with confidence and clarity – and hopefully find a better deal.
Things you need to consider may include:
Are you eligible to refinance?
Will there be exit fees and other costs to pay out your current car loan?
How will the new repayments suit your budget?
Will the cost savings make up for any refinancing costs?
Is access to better cash flow – even if it means a longer most costly loan in the long-run – worth the switch?
Check your eligibility
The steps to refinancing a car loan are similar to the hoops you needed to jump through to get your initial car loan approved.
Depending on the lender, there will be specific eligibility criteria that usually includes proof of income, a budget showing your household expenses and a credit history the lender is happy to work with.
Like any loan, you’ll need specific supporting documents before your finance application is approved.
Security
How old your current car is can be a critical factor in a lender deciding whether they will offer you a refinancing option. Many lenders won’t look at older cars with high mileage (think more than seven years). That’s because the resale value of the car won’t offer them enough security for the loan amount.
When should you refinance your car loan?
If interest rates have dropped since your original loan approval, that’s a good reason to refinance
If the main reason to refinance is the hunt for a better rate, you’ll want to keep the original loan term, rather than switch to a longer loan term.
You want your repayments to reduce
If refinancing your car loan does give you access to a lower interest rate, your monthly car loan repayments will decrease. But if you’re trying to free up cash flow and switching to a longer loan term, remember that those smaller monthly repayments will mean more money paid back across the life of the car loan.
Your credit score is better
If you had a challenging credit history when you first applied for your car loan, you may have been limited to lenders who didn’t offer the most competitive rates. Having an improved credit score that gives you access to a wider range of lenders could be a good reason to switch, but make sure you crunch all the numbers before you decide.
If you don’t know your credit score, you can access a free credit report every three months.
Some of Australia’s major credit reporting companies include:
You want a car loan with better features
Depending on your financial circumstances, you might want the choice of making extra – or more frequent – repayments on your car loan.
You want to go greener
If your petrol-guzzling car is no longer aligned with your budget, or your sustainable ideals, switching to an electric vehicle (and accessing subsidies) could be another reason to refinance and borrow more.
You want to reduce your loan term
Perhaps you’re in a really good financial situation right now and want to get ahead of your repayments but your current car loan doesn’t allow you to make extra repayments or charges significant fees for doing so.
In this case, refinancing to a loan with a shorter loan term, or one that allows extra repayments, may be a good move.
You want to extend the life of your loan
If refinancing is about your hope to spread smaller repayments over a longer period, refinancing may be right for you – as long as you understand it will cost you more in the end.
When is car refinancing a bad idea?
If the value of your car is less than your loan debt
Although property typically appreciates, cars depreciate in value – usually the minute you drive your new car away from the dealership.
If your car is worth less than what you currently owe on your car loan, refinancing will be difficult.
The exit fees, time and stress to refinance is not worth the potential savings
Depending on the lender, car loan refinancing can mean exit fees, lots of paperwork and other associated costs.
You want to apply for more finance in the near future
Each time you apply for a loan – any type of loan – it leaves an impact on your credit score.
Your car loan is nearly finalised
If you’ve made it towards the end of your car loan, this is probably not the right time to refinance, unless rates are much lower than your current interest rates.
The bottom line:
Right now, the best reason to refinance is about cash flow – but it will likely come at a cost.
Financial decisions are intensely personal and often have many contributing factors.
The best advice around considering any loan refinancing is to crunch your numbers and be realistic about your expectations. If it adds up the way you need it to, it could be positive. If not, it might need more thought and research.
Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
