How do you refinance your car loan to put the brakes on your costs?

Refinancing your car loan is one option that could land you a better deal that lowers your monthly repayments.

Replacing an existing loan with another one under new terms, if you choose wisely and are able to get approved for it, may help you save money and give you greater flexibility and control over your car loan. So, why might you consider refinancing, how does it work and what are some of the key benefits and drawbacks that may be involved?



Why should I refinance my car loan?

Car owners who want to reduce their monthly repayments may find it helpful to refinance their existing car loan to a different one that offers a lower interest rate, lower fees or different loan terms.

If you have a good credit score and have been consistently meeting your loan repayments, you may be able to negotiate a lower interest rate on your car loan with your existing provider. By comparing your options, you may also find a better interest rate or loan terms that better suit your needs with another lender. A lower interest rate can help you to save money in the long term and decrease your monthly repayments. Fees can also make a difference, so it’s worth paying attention to the loan’s comparison rate which incorporates most fees and is designed to give a more accurate idea of what the loan will cost each year than the interest rate does, based on a sample loan amount and term.

Negotiating a longer loan term may 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 because you would be paying down the loan’s balance more slowly and lenders generally charge interest monthly, you would also end up paying more in interest overall if you extended your loan term and all the other loan conditions stayed the same. If you are refinancing your car loan to save money, it’s also worth checking that switching fees do not cancel out your potential savings. These could include early exit fees charged by your current lender or any application fees on the new loan.

If you are interested in saving money overall, and not just reducing your monthly repayments, you could also choose to switch to a loan with a lower interest rate but keep your repayments the same, or even pay off extra if the new loan allows extra repayments without penalty. This could help you to pay off the loan faster and pay less interest, so long as you can ensure you aren’t paying too much in the way of extra fees in exchange for that lower interest rate.

How does refinancing a car loan work?

If you choose to refinance your car loan by switching to another provider, the money you borrow from the new lender is used to pay off the remaining balance of your previous car loan. You will then enter into a new loan contract with the new lender.

It’s a good idea to check with your previous lender that the account you held with them is closed after the balance has been paid.

How much could you save by refinancing your car loan?

The hypothetical example below, based on the results of Canstar’s most recent Personal and Car Loan Star Ratings, shows the potential difference in monthly repayments and total cost for a borrower who refinances their used car loan after one year. The example is based on a $15,000 car loan with a five-year term.

Interest rate Ongoing fee Monthly repayment
Year 1 (database average car loan) 10.33% $36 $321.15
Years 2-5 (5-Star average car loan) 5.90% $19 $294.95

Based on products rated in the Used Car Loan profile of the Canstar Personal and Car Loan Star Ratings (November 2020). Average interest rate calculations use the midpoint of the rate range where applicable. Total cost includes total interest paid plus any applicable upfront and ongoing fee(s), which are assumed not to be capitalised (added to the loan balance). Average calculations for fees based on all applicable products, including those that don’t charge a fee.

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 applicable fees and charges attached to both your old and new loans could be a good start.

Here are a few other key tips to consider:

  • Check that your loan costs will be less than your previous loan. Consider the interest rate and any fees that may apply, including any early exit fees that may be charged if you get out of your old loan early.
  • 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, even if your interest rate doesn’t change.
  • Make sure the new loan has the features you want. These could include the flexibility to make additional repayments without penalty or having the use of a redraw facility that allows you to withdraw extra repayments you have made if you need to. These features may help you pay off the loan sooner.
  • Make sure you are in a strong position to refinance before applying for the new loan. For example, if you have been financially impacted by the COVID-19 crisis, this could potentially affect your ability to obtain approval for a loan.
  • If your existing loan is secured by your vehicle, as many car loans are, this may make refinancing more complex. For example, the new lender may not accept the vehicle as security if its value has dropped since you purchased it or it is over a certain age. As an alternative, you may be able to refinance to an unsecured car loan, but it may be difficult to find an unsecured loan with a lower rate if your current loan is secured.

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 a car loan?

As with many major financial decisions, there are a number of possible pros and cons to refinancing your car loan.

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, if you refinance to a variable rate loan, your interest rate could move up and down.
  • 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. Alternatively, you could keep your repayments the same as what you’re already paying, which wouldn’t affect your cash flow in the short term but could shorten the time taken to pay off the loan and save you money overall.
  • You could potentially find or negotiate a loan with 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.

Possible 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 possibly an application fee for the new loan as well. It’s important to consider this in your research so you can properly weigh up your options.
  • Even if you end up with a lower interest rate, your existing loan may come with features and tools which the new loan doesn’t. This could impact how easy it is to manage your loan.

Additional reporting by Sean Callery. This article was reviewed by our Sub Editor Tom Letts before it was updated, as part of our fact-checking process.

Follow Canstar on Facebook and Twitter for regular financial updates.


Thanks for visiting Canstar, Australia’s biggest financial comparison site*

→ Looking to find a better deal? Compare car insurancecar loanshealth insurancecredit cards, life insurance and home loans with Canstar. You can also check your credit score for free.

Share this article