Refinancing a car loan
Refinancing a car loan allows you to borrow money from a lender to repay an existing car loan. Car loan refinance is often used to secure lower interest rates or renegotiate the terms of an existing car loan, and may also be used to refinance an outstanding balloon payment to save the borrower thousands of dollars.
How does it work?
Car loan refinance works in a similar way to a secured car loan. You apply for a new loan with a new lender, and use the funds to repay the balance of your existing car loan. You will then continue to make regular repayments on the new loan until the principal balance plus interest is repaid.
Here is an example:
- Your current car loan is $30,000 with an interest rate of 10% over a five-year term
- Estimated monthly repayments are $637.41
- Regular repayments reduce your principal to $25,000
- You refinance your car loan with another lender for the same term at a rate of 7%
- The new lender releases $25,000 in funds to repay the existing loan
- Your new car loan is $25,000 with an interest rate of 7% over a five-year term
- Estimated monthly repayments are $495.03
By refinancing, you have potentially saved over $6,000 in repayments.
You can only refinance a car loan if the vehicle is currently under finance. Alternatively, you may use a vehicle you own as collateral on a secured personal loan.
How to refinance a car loan in 5 simple steps
- Consider your options - You can compare car loans to ensure you meet eligibility criteria and understand the rates, terms, and any initial or ongoing fees associated with your new loan.
- Calculate your car loan repayments - Use a car loan calculator to quickly estimate repayments on your new car loan to find the most suitable payment schedule and instalment amount for your circumstances.
- Apply for car loan refinancing - There are many ways to apply for a car loan. Non-bank lenders will usually offer an online application process with fast approval.
- Repay your existing car loan - If you are approved, funds will be released under your new car loan agreement, which you will use to repay your existing loan and any exit or early repayment fees.
- Repay your new car loan - Once you’ve repaid the balance on your existing car loan, you will continue to make regular repayments on your new loan.
Make sure you fully understand any early-repayment fees, exit fees, and application fees before committing to refinancing your car loan.
Why refinance a car loan?
Refinancing a car loan can help borrowers save considerable amounts of money. While the most common reason may be simply to secure a lower interest rate, there are many situations where it can be highly beneficial.
Car loan refinance can be used to:
- Choose a more suitable lender
- Extend the terms of a car loan
- Negotiate a lower interest rate
- Reduce total repayments
- Reduce regular instalment amounts
- Restructure a residual payment to conserve cash flow
- Receive a better rate on a bad credit car loan
- Add a guarantor to a new car loan agreement
Review your current loan documents to understand any early exit or early repayment fees which may affect the amount you would save through refinancing.
Refinancing a car loan to reduce repayments
There are a few ways to reduce repayments through car loan refinance. The most popular is to negotiate lower car loan interest rates, which will reduce both the regular repayment amount and the total interest paid over time. Borrowers can also reduce repayments by extending their loan term or selecting a loan with fewer fees.
Lower interest rates
Lower interest rates reduce both your regular repayments and the total amount of interest paid over the course of the loan. You may choose to keep your repayments at the same amount and reduce your total repayments, or keep your term at the same length and opt for a lower regular repayment amount.
Longer loan terms
You can negotiate an extended term, which may help reduce the cost of your regular instalments. It’s important to remember that a longer term will only reduce your scheduled repayments, and will often see you paying a greater amount of interest over time.
Lower fees
You may also be able to select a lender that charges fewer fees, or the same fees at a reduced amount. While it is unlikely to be your main reason for refinancing, ongoing fees can significantly increase your total repayment amount, especially over a longer term.
You can use a car loan calculator to estimate your regular and total repayment amounts, and to calculate the total interest paid over the term.
Refinance car loan with bad credit
If you apply for a bad credit car loan, you will most likely be paying much higher rates than a standard vehicle loan. If you can commit to regular repayments on a car loan, you may be able to improve your credit score and receive a more generous rate.
If you are considering bad credit refinance:
- Request a copy of your credit score to see how your repayments have improved your credit rating
- Ensure you have made full and on-time repayments throughout the history of the existing loan
- Compare lenders to find the best rate for your improved credit score
Lenders assess applications based on the risk presented by the borrower. A poor credit rating is often associated with high-risk borrowers; improving your credit score could lower your risk level and the interest rate applied to your loan.
You will generally need to demonstrate 12 months of consistent, stable repayments to refinance a bad credit car loan.
Refinance a car loan balloon payment
Both personal car loans and business car loans can often include a balloon (residual) payment, which helps reduce regular repayment amounts at the cost of a significant, one-time payment made at the end of the term.
However, some lenders may provide an option to refinance the remaining balloon amount into a new loan, allowing you to conserve cash flow and repay the residual in regular instalments.
Here’s an example of how refinancing a balloon payment works:
- Your car loan is $30,000 with an interest rate of 10% over a five-year term
- The loan includes a balloon payment of 25% ($7,500)
- Repayments are calculated on a principal of $22,500
- Monthly repayments are $478
- At the end of the term, you choose to refinance the balloon amount
- Your new car loan is $7,500 with an interest rate of 8% over a three-year term
- Monthly repayments are $176
Keep in mind that you will continue to pay interest when refinancing your balloon payment. In the example above, repaying the balloon payment in full would save $711 of interest.
You will often find balloon payments included in chattel mortgage agreements.
When to refinance a car loan
When refinancing your car loan, you will often be best-placed to renegotiate a more favourable agreement if you have made repayments for at least 12 months. This is important for a few reasons:
- You display an ability to make regular repayments over the full course of a year
- Your vehicle will have a minimum amount of deprecation
- You will have allowed a considerable amount of time for your credit rating to improve
Where a car has considerable depreciation, and the value of the vehicle is less than the amount still owed to the lender, you may find difficulty in gaining approval.
Use trusted vehicle valuation sites to determine the current cost of your vehicle before applying.
How to compare refinance options
If you are refinancing your car loan with a new lender, you will need to compare offers to find the most suitable arrangement. When researching lenders and reviewing various offers, you may wish to consider:
- Lender criteria for applying interest rates
- Minimum and maximum loan terms
- Fixed or variable interest rates
- Extra repayments or early repayment options
- Upfront or ongoing fees
Summary
Refinancing a car loan is a form of debt refinance, generally used to secure a lower interest rate on a new loan than the rate applied to an existing loan. This can be done by changing lenders, or reducing your borrower risk profile by committing to regular repayments.
Refinance Car Loan Pros and Cons
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Refinance Car Loan FAQ
Can I refinance a car loan with a new lender?
You can choose to refinance your car loan with another lender if you are unhappy with your current lender. Often, it’s best to speak with your current lender before applying with another, as they may be able to offer you a personalised rate offer.
How soon can you refinance a car loan?
In general, you will need to wait 12 months before refinancing a car loan. This allows a lender to assess your repayment ability and risk level, and ensures your credit score isn’t affected by multiple finance applications in a short space of time.
Is refinancing a car loan expensive?
The point of refinancing is to reduce and lower your payments. It has the potential to save you thousands by reducing the amount of interest you are required to pay. However, there may be early repayment fees and application fees involved in the refinance process, and you will need to factor these into your decision before applying.
Can I refinance a bad credit car loan?
Yes, you can refinance a bad credit car loan to negotiate a lower rate. By making consistent payments for more than 12 months of your existing loan, you can improve your credit rating and refinance to a lower rate. Carefully research your options before applying, as declined applications may affect your credit score.
