When Does Refinancing Your Car Loan Make Sense?

What refinancing actually means

Refinancing replaces your current loan with a new one, usually from a different lender. The new loan pays out the existing balance and starts fresh terms, which can mean different pricing, a different term length and sometimes a different structure altogether.

Most people refinance to improve the deal or to lower the monthly repayment. Others do it to change the term itself, shortening it to clear the debt sooner or extending it to ease monthly pressure, or to fold several loans into one.

The most common reason is that a better deal exists

Lending markets shift. The deal you accepted two years ago may no longer be competitive, and if your credit profile has improved since then, you may now qualify with lenders who would not have considered you at the time.

The test is not complicated. Take your current outstanding balance and see what the market would offer on it today. If the saving is large enough to cover any exit costs on your current loan and the costs of setting up the new one, refinancing makes sense. If it barely covers them, it does not.

The further you are from the end of the loan, the more room there is for a better deal to pay off. A broker can run the exact numbers for your balance and remaining term before you commit to anything.

Improving your cash flow position

Sometimes the pricing barely moves but stretching the loan over a longer term brings the monthly repayment down. If your circumstances have changed, perhaps reduced income or new expenses, that breathing room can matter more than anything else.

The trade-off is more interest paid in total across the longer term. If cash flow is the priority and you go in understanding the total cost, extending the term is a perfectly legitimate tool.

Consolidating multiple debts

Several loans, say a car loan alongside a personal loan, can sometimes be rolled into a single facility. One repayment and one set of terms is simpler to manage, and it works best when the new facility prices better than the debts it replaces.

Be careful rolling short-term expensive debt into a long-term secured loan though. The monthly repayment falls, but if the term stretches out substantially you can end up paying far more interest overall.

When refinancing does not make sense

Refinancing rarely stacks up early in the term. Most of the interest on a loan repaid in regular instalments is paid in the first stretch, so refinancing in year one or two means you have paid mostly interest, still owe most of the principal, and are now adding establishment costs on top.

It also struggles when exit costs are high. Some loans carry early repayment fees or fixed-rate break costs, and those need to be counted before you assume the switch is worthwhile.

And if your credit position has gone backwards since the original loan, the market may offer you worse terms than you already have. A broker can check where you stand before any application touches your file.

The right process

1. Gather your loan details. Your broker looks at your current balance, remaining term and existing loan.
2. Compare against the market. The broker checks those details against what the market can offer today, before any application touches your file.
3. Count the costs. Include any early repayment fees or fixed-rate break costs, plus the cost of setting up the new loan. The saving needs to cover them.
4. Skip the direct applications. Don't apply to a handful of lenders yourself to compare, because every formal application puts an enquiry on your credit file.
5. Lodge one well-placed application. One conversation, then one application, gets the same answer without the damage to your file.
6. Settle and pay out the old loan. If refinancing stacks up, it usually runs a few days from application to settlement. Your broker handles the payout of the existing loan directly with the old lender.