Refinancing your car loan could get you a better interest rate, lower monthly repayments or give you more flexibility.
How does it work?
To refinance your car loan, you need to apply and get approved for a new loan. This new loan will cover the amount stilling owing on the current loan. The new lender will want to see the usual loan application documents, as well as information about your current loan repayments and the car associated with the loan.
You use the money from the new loan to pay off your existing car loan (or your new lender may do that for you), then simply pay off the new loan – ideally at a lower interest rate or monthly repayment.
What to consider when refinancing your car loan?
Are you saving money over the life of the loan?
It’s worth working out whether you will save money in the long term by refinancing your car loan. A lower interest rate should ideally mean you’ve paid less by the time the loan is paid in full.
To calculate the total cost of the loan, check upfront fees such as application, establishment and ongoing monthly fees. By law, lenders must display the ‘comparison rate’ which is calculated by the overall cost of the entire loan including the interest rate and most fees, which is then expressed as a single percentage of the entire amount borrowed.
Are you looking for lower car loan repayments?
If you want lower repayments, you can extend the term of your car loan when you refinance. While the size of your repayments will be lower, freeing up some cash, you’ll take longer to pay it back which may mean more interest paid over the life of the loan, depending on the interest rate offered with the new loan.
Are you looking for flexibility?
You can also refinance your car loan with a lender that grants you the flexibility to make extra repayments or repay the loan off early without penalty. This is a smart move as it can reduce the time it takes you to repay your car loan, saving you on interest.
What reputation does your financial services provider have?
It is worth knowing that the new lender or online lending platform is legitimate and has a good reputation. To do so check:
- Reviews on Google and independent sites such as Product Review or Trustpilot
- Independent comparison sites like Canstar, which have ratings of 100s of car loans and finance providers
How much will it cost to exit your current loan?
Some lenders will charge you for paying off your loan ahead of the agreed ‘term’, this is known as an ‘early exit fee’. If you don’t have long left on your existing loan and the current lender will charge hefty exit fees, refinancing your car loan may not be worth it.
Have multiple debts?
If you have multiple debts (loans, credit cards, etc) you could also pay these all off and give yourself one consolidated payment, making it cheaper and easier to manage. To do so, look at getting a personal loan for debt consolidation.