Refinancing your car loan can be a great way to reduce your repayments, access lower interest rates and enjoy better loan features
This article provides an overview of the refinancing process, the pros and cons, and key considerations when deciding whether or not refinancing is right for you.
Car loan refinancing explained
Imagine you took out a car loan several years ago. You did your research to make sure you were getting the best car finance rates and you saved up so you could make a substantial downpayment. In short, you did everything right. However, now it’s five years later, and your financial situation has changed, the market has shifted, and your loan terms don’t look so great anymore.
In many cases, this problem can be resolved with refinancing. Refinancing is the process of taking out a new loan with more favourable terms to pay off your existing loan. It could be with the same lender or a different lender. Once your previous loan is repaid, you’ll begin making repayments on the new loan in line with its improved loan terms.
The refinancing process
Step 1: Review your loan
Start by reviewing the terms of your current loan. Establish how much you still owe and whether you’ll have to pay any early exit fees. Depending on how far along you are with your repayments, it’s possible that exit fees may negate the benefits of refinancing.
Step 2: Compare offers
Make sure you have compared all options before zeroing in on another lender. Look at any fees associated with the loan, as well as the loan terms and conditions. You may find that even though another lender offers a lower interest rate, they don’t provide the same features as your current lender, or they charge higher fees.
At this point, you could also discuss your interest in refinancing with your current lender – they may be willing to offer more favourable terms to keep you as a customer.
Step 3: Calculate savings
Once you’ve reviewed your options, determine whether or not refinancing will save you money. Make sure to account for short-term and long-term savings. For example, you may be able to secure lower monthly repayments with a different lender, but this may only be because the loan term is longer, meaning you’ll ultimately pay more interest over time.
Step 4: Apply and refinance
If you identify a refinancing opportunity that meets your needs, proceed with your loan application. Once it’s approved, advise your current lender of your decision and request a statement that details how much you still owe. Your new lender will pay out this amount and you’ll begin making repayments to them instead, as per your new loan terms.
Vehicle refinance pros and cons
Pros of refinancing your car loan
- You may be able to access a lower interest rate compared with what was available when you obtained your previous loan
- If you choose to extend your loan term with a new lender, your regular repayment amount will likely decrease
- If your situation has changed, you can use the refinancing process to change the structure of your loan, e.g. you could add a joint borrower if you’re now sharing your car
Cons of refinancing your car loan
- Extending your loan term may decrease your regular repayment amount but will likely lead to you paying more interest over time
- The cost of potential entry and exit fees may outweigh the benefits of refinancing in the first place
- Different lenders offer different features, e.g. your new lender may not offer redraw facilities, meaning you can’t access any additional payments you’ve made on your loan
Is refinancing right for you?
Refinancing is often a good choice in the following situations:
- Your credit score has improved, or you’re earning more money, giving you greater borrowing power
- Your loan had a significant fixed interest component and interest rates have recently fallen
- It’s early in the life cycle of your loan and you have identified a lender that provides better loan terms
You may also decide to investigate refinancing if your financial situation has changed and you can no longer afford your repayments. By refinancing your loan, you can attempt to extend the loan term, reducing the size of your regular repayments. This will likely lead to higher interest payments over time, but it can be a good short-term solution until you get back on your feet.
Refinancing is generally not worth pursuing if you’re close to the end of your loan term. It’s likely that the cost of exiting your current loan and establishing a new one will outweigh the benefits of refinancing.
Ultimately, you’ll need to consider your circumstances and whether the alternative loan options are attractive enough to justify refinancing. Just make sure you undertake a thorough comparison before moving forward!
Get the best car finance rates by refinancing with Yes Loans
Do you have questions about vehicle refinancing? Our Perth car finance experts are here to help!
Get in contact with our helpful team or explore car loans online – we say YES more often.
