How to Refinance Your Car Loan and Save Money

If you are paying more than you need to on your car loan, refinancing could save you hundreds or even thousands of dollars over the remaining life of the loan. Many Australians take out car finance through a dealership at the time of purchase without shopping around, which often means they are paying a higher rate than necessary. This guide walks you through the refinancing process, shows you how to calculate whether it is worth it and highlights the pitfalls to avoid.

When Does Refinancing Make Sense?

Refinancing your car loan is worth considering if any of these situations apply:

• You got your loan through a dealer: Dealer-arranged finance often carries a margin of 2-5% above what you could get by going direct or through a broker. A $30,000 loan at 12% instead of 7% costs you roughly $4,400 more over 5 years.
• Interest rates have dropped: If general market rates have fallen since you took out your loan, there may be better deals available now.
• Your credit has improved: If your credit score has improved since you originally borrowed (perhaps you had some defaults that have since aged or been resolved), you may now qualify for prime rates.
• You need to reduce repayments: If your financial situation has changed, refinancing can extend the term to lower monthly payments. However, be aware of the cost implications.
• You have more than 12 months remaining: The savings from a lower rate need enough time to outweigh the costs of refinancing.

How to Calculate Your Savings

Before refinancing, do the maths to ensure you will actually save money. Here is a step-by-step approach:

1. Find your current payout figure: Contact your current lender and request a payout figure. This is the total amount needed to close the loan, including any accrued interest and fees. It may differ from the balance shown on your statements.
2. Calculate remaining cost under current loan: Multiply your current monthly repayment by the number of months remaining. This is the total you will pay if you stay.
3. Get a quote for the new loan: Obtain a rate and repayment quote for refinancing the payout amount over the remaining term (not a longer term, for a fair comparison).
4. Calculate total cost of new loan: Multiply the new monthly repayment by the number of months, then add any new establishment fees and PPSR registration costs.
5. Add exit fees: Include any early termination or discharge fees from your current lender.
6. Compare: Subtract the total new loan cost (step 4 + step 5) from the remaining current loan cost (step 2). If the result is positive, refinancing saves you money.

A Practical Example

The Refinancing Process

1. Check your current contract: Review for early termination fees, discharge fees and any other exit costs.
2. Get your payout figure: Request this from your current lender. It is usually valid for 7-14 days.
3. Shop for a new loan: Compare rates from multiple lenders or use a broker to find the best deal. You will need to provide standard documentation: ID, income proof, bank statements and details of the vehicle.
4. Apply and get approved: The new lender will assess your application. They will also value the vehicle to ensure it provides adequate security.
5. Settlement: The new lender pays out your old loan directly. The PPSR registration transfers from the old lender to the new one. You start making repayments on the new loan.

The whole process typically takes 3-7 business days from application to settlement. There is usually no interruption to your use of the vehicle.

The Extended Term Trap

One of the most common mistakes when refinancing a car loan is extending the term to reduce the monthly repayment. While lower repayments can ease short-term cash flow pressure, the extra months of interest can cost you far more than you save on the rate reduction.

The rule of thumb: refinance to a lower rate over the same or shorter term. If you must extend the term, calculate the total cost to ensure you are still ahead overall.

What to Watch Out For

• Early exit fees: Some lenders, particularly those offering fixed-rate car loans, charge significant break fees. Always check before proceeding.
• Vehicle age restrictions: Most lenders have a maximum vehicle age at the end of the loan term (usually 10-12 years). If your car is already 7 years old, you may only be offered a 3-5 year term.
• Negative equity: If you owe more than the car is worth, lenders may decline the refinance or offer less favourable terms.
• Establishment fees: Some new lenders charge upfront fees that can eat into your savings. Compare the total cost, not just the interest rate.