If you took out a car loan a while back and rates have dropped — or if you got stuck with a high rate to begin with — you might be wondering: should I refinance?
Refinancing can save you money, but it's not always the right move. Here's how to figure out if it makes sense for you.
What Is Car Loan Refinancing?
Refinancing means taking out a new loan to pay off your existing car loan. The new loan (hopefully) has better terms — a lower interest rate, lower fees, or more suitable repayment structure.
You're essentially swapping one loan for another.
When Refinancing Makes Sense
1. Interest Rates Have Dropped
If rates have fallen since you took out your loan, refinancing to a lower rate can reduce your repayments and the total interest you pay.
2. Your Credit Has Improved
If your credit score was lower when you first got the loan, you may have been stuck with a higher rate. If your credit has improved, you might now qualify for a better deal.
3. You Got a Bad Deal to Begin With
Maybe you took dealer finance without shopping around, or used a lender who charged higher rates. Refinancing can get you out of a less-than-ideal loan.
4. You Want to Change Your Repayment Structure
Refinancing can let you:
- Extend your loan term (lower repayments, but more interest overall)
- Shorten your loan term (higher repayments, but pay it off faster)
- Remove a balloon payment
When Refinancing Might NOT Make Sense
1. You're Close to Paying Off the Loan
Most of the interest on a car loan is paid in the early years. If you're near the end of your loan, there's less interest left to save.
2. Exit Fees Are Too High
Check your current loan's exit fees. If they're significant, they might wipe out any savings from refinancing.
3. Your Car Is Too Old
Many lenders won't refinance cars over a certain age (often 10-12 years old at the end of the new loan term). If your car is getting older, options may be limited.
4. The Savings Are Minimal
If the rate difference is small and there are fees involved, the effort might not be worth it. Do the maths first.
How to Calculate If It's Worth It
Here's a simple approach:
- Find your current loan details — remaining balance, interest rate, remaining term, exit fees
- Get a quote for a new loan — new rate, fees, term
- Calculate total cost of each option:
- Current loan: remaining repayments + any exit fees
- New loan: new repayments over the term + establishment fees + exit fees from old loan
- Compare — is the new loan cheaper overall?
Example
Current loan: $15,000 remaining, 12% interest, 3 years left, $400 exit fee
New loan: $15,000, 8% interest, 3 years, $200 establishment fee
Current loan total cost: ~$17,820 + $400 = $18,220
New loan total cost: ~$16,920 + $200 + $400 = $17,520
Saving: ~$700
How to Refinance
- Check your current loan — note the balance, rate, and any exit fees
- Shop around — compare rates from multiple lenders or use a broker
- Apply for the new loan — standard application process
- New lender pays off old loan — they handle the payout directly
- Start repaying new loan — hopefully at a better rate
Things to Watch Out For
- Exit fees — factor these into your calculations
- Establishment fees — some new loans charge setup fees
- Extended terms — if you extend the term, you might pay more interest overall even with a lower rate
- Negative equity — if you owe more than the car is worth, refinancing can be tricky
The Bottom Line
Refinancing can be a smart move if the numbers stack up. The key is to do the maths — factor in all fees and compare the total cost, not just the monthly repayment.
Think refinancing might work for you? Get in touch and we'll help you compare your options — no obligation.
READY TO GET STARTED?
Get a free, no-obligation quote in minutes.
Get Your Free Quote →