Replacing an existing debt with another debt under new terms, if you choose wisely, may boost your savings and give you greater flexibility and control over your car loan. So, why should you consider refinancing, how does it work and what are the key benefits and drawbacks?
Why should I refinance my car loan?
Car owners wanting to reduce their monthly repayments may find it helpful to refinance into a loan that offers a lower interest rate or longer loan term. Refinancing can also be handy for adding or removing someone else from the contract.
If you have a good credit score and have been consistently meeting your loan repayments, you may be able to negotiate with your lender a lower interest rate on your car loan. By comparing your options, you may also find a better interest rate with another lender. A lower interest rate can help you to save money in the long term and decrease your monthly repayments.
Negotiating a longer loan term can also help lower your monthly repayments. The longer the loan term, the more months to divide the loan payment by, which may reduce the amount due each month. But it’s important to remember that although your monthly repayments might be smaller, it could mean you end up paying a higher total cost due to higher total interest payments. Also, it’s important to remember that if you have been financially impacted by the COVID-19 crisis, this could potentially affect your ability to obtain approval for a loan.
If you are refinancing your car loan to save money, it’s also worth checking that any fees do not offset your potential savings. Watch out for any early exit fees or any application fees.
The table below displays a snapshot of car loans on Canstar’s database with links direct to providers’ websites. Please note this table has been sorted by the advertised interest rate (lowest to highest) then by provider name (alphabetically). The table was formulated based on a loan amount of $20,000 paid over five years in NSW for a new car.
How does refinancing a car loan work?
If you choose to refinance your car loan, the money you borrow from the new lender will cover the total balance of your previous car loan, allowing you to pay the balance of your old loan. You will then enter into a new loan contract with the new lender.
It’s a good idea to make sure that the account with your old lender has closed after the balance has been paid.
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Tips to consider when refinancing your car loan
If you want to refinance your car loan and possibly save some extra money, thoroughly comparing your options and making sure you are aware of all fees and charges is a good start.
Here are a few key tips on what to consider:
- Check that your loan repayments will be less than your previous loan. This includes considering the interest and any fees.
- Check that you won’t end up paying more interest over the life of the loan. Remember, while a longer loan term may reduce your monthly repayments, it could also mean you end up paying more interest in the long run.
- Make sure the new loan has the features you want. This could include the flexibility to make additional repayments or having the use of a redraw facility, which may help you pay off the loan sooner.
It might be a good idea to try Canstar’s car loans comparison tool if you’re looking to compare your options for refinancing:
What are the pros and cons of refinancing?
As with many major financial decisions, there are possible pros and cons to refinancing.
Possible pros of refinancing a car loan:
- If you’re able to negotiate a lower interest rate than what you were previously paying, this could leave more savings in your pocket. Of course, interest rates can move up and down, so it can be important to consider timing when shopping around for a lower interest rate.
- If you can secure lower repayments than you paid on your previous loan, this could be particularly helpful if you need a little extra cash flow. A longer loan term could lower your repayments, but be mindful of how it could affect your total interest payments over the life of the loan.
- You could potentially add more features to get bang for your buck and make the most of your car loan. These could include having the flexibility to make additional repayments or the option to redraw money when you need it.
- Changing lenders could be a better option if you have had trouble with your lender in the past. If you have had a good experience with your lender, you may be able to negotiate to refinance with them, but it’s still generally a good idea to compare all your options and make sure you’re on a competitive interest rate.
Cons of refinancing a car loan:
- You might end up paying more interest over the life of your loan if you negotiate a longer loan term. While you might be able to refinance with a lower interest rate, the extended loan term may mean you end up paying more interest over the life of the loan.
- Switching car loans might mean you have to pay a fee for exiting your previous contract, and even an application fee for the new loan. It’s important to consider this in your research so you can properly weigh up your options.