Refinancing Your Car Loan in Australia: When and How to Do It

If you are paying more interest on your car loan than current market rates, refinancing could save you money. Refinancing involves replacing your existing loan with a new one, ideally at better terms. This guide explains when refinancing makes sense, how the process works, and what to watch out for.

What Is Car Loan Refinancing?

Refinancing a car loan means taking out a new loan to pay off your existing one. The new loan ideally has a lower interest rate, reduced fees, or better terms that suit your current situation. You continue making repayments, but to the new lender under the new terms.

The process is similar to applying for a new car loan. You apply with a lender, get approved, and the new lender pays out your existing loan. The vehicle title or security interest transfers to the new lender, and you begin repayments under your new loan agreement.

When Does Refinancing Make Sense?

Interest Rates Have Dropped: If market rates have fallen since you took out your original loan, you may be able to secure a significantly lower rate. Even a 1 to 2 percent reduction can save hundreds or thousands over your remaining loan term.

Your Credit Score Has Improved: If your credit score was lower when you originally borrowed and has since improved, you may now qualify for better rates than you could before. Major improvements in credit scores can unlock meaningfully better loan products.

You Were Paying Dealer Finance Rates: Dealer finance often comes with higher rates than you could obtain independently. If you financed through a dealership, shopping around now might reveal much better options from banks or online lenders.

Your Financial Situation Has Changed: Refinancing can also help if you need to reduce monthly payments due to changed circumstances. Extending the loan term through refinancing lowers each payment, though you will pay more interest overall.

You Want Different Loan Features: Perhaps your current loan does not allow extra repayments without penalty, or lacks a redraw facility you now want. Refinancing can move you to a loan with features that better suit your needs.

When Refinancing May Not Be Worth It

Refinancing is not always beneficial. If your existing loan has high break costs or early termination fees, these costs might outweigh the interest savings from a lower rate. Calculate the total cost including all fees before deciding.

If you are close to the end of your loan term, the remaining interest may not be significant enough to make refinancing worthwhile. The effort and any fees involved may exceed the small savings available.

Your vehicle's value also matters. If your car has depreciated significantly and is worth less than your loan balance, finding a new lender willing to refinance may be difficult. Lenders are cautious about loans where the security does not adequately cover the debt.

Calculating Potential Savings

Before refinancing, calculate whether the move will actually save you money. You need to consider the interest rate difference and remaining loan term, any exit fees from your current loan, establishment fees for the new loan, and ongoing fees comparison between the two loans.

For example, if you have $15,000 remaining on a loan at 10 percent with three years left, you are set to pay approximately $2,400 in interest. If you can refinance to 7 percent, your interest drops to approximately $1,650, a saving of $750. But if exit fees are $500 and new loan fees are $300, your net saving is minimal.

Use our car finance calculator to compare your current repayments with what a new loan would cost at a different rate. This helps you see the monthly difference and the total interest saved over the remaining term.

The Refinancing Process

Step 1: Review Your Current Loan Check your existing loan documents for the current balance, interest rate, any break fees, and how much time remains on your term. This information forms the baseline for comparison.

Step 2: Shop for New Loans Compare offers from multiple lenders including banks, credit unions, and online lenders. Look at interest rates, comparison rates, fees, and loan features. Request quotes based on your remaining loan amount.

Step 3: Calculate Total Costs Add up all the costs of switching including exit fees, new loan fees, and the interest over the remaining term. Compare this to the cost of staying with your current loan.

Step 4: Apply for the New Loan If the numbers work in your favor, apply for the new loan. You will need to provide similar documentation to your original loan application including identification, income proof, and details of the existing loan.

Step 5: Settlement Once approved, the new lender arranges payout of your existing loan. The security interest transfers to the new lender. You begin making repayments to your new lender under the new terms.

Tips for Successful Refinancing

Time your refinancing appropriately. Apply after any initial loan period restrictions have passed and before too much of your loan term has elapsed. The middle years of a loan often offer the best refinancing opportunities.

Maintain or improve your credit score between loans. A better score when refinancing means access to better rates. Pay all bills on time and keep credit card balances low in the months before applying.

Consider shortening your loan term when refinancing rather than just chasing lower monthly payments. If you can afford similar payments at a lower rate, keeping the same repayment amount pays off the loan faster and saves significantly more in interest.

Read the fine print of the new loan carefully. Ensure it offers the flexibility you need for extra repayments, and check for any features that might become important over the loan term.

Take the Next Step

If you think refinancing might benefit you, start by gathering information about your current loan and researching alternatives. Calculate your potential savings using tools like our car finance calculator to compare different scenarios. With careful analysis, refinancing can be an effective way to reduce your car finance costs.