Quick answer
Refinancing replaces your current car loan with a new one, usually to lower the total cost, change the term or get out of a loan you regret. It's worth it when the new loan's total cost, including payout fees on the old loan and any new fees, is lower than what you'd pay by staying, and the term doesn't stretch past the car's useful life.
Key points
- Get a payout figure from your current lender, including any early exit fees.
- Compare the remaining cost of your current loan with the full cost of the new one.
- A longer term can lower repayments but raise the total cost.
- Plan for any balloon payment well before it falls due.
Maybe you signed up in a hurry at a car yard. Maybe your credit has improved since. Maybe a balloon payment is coming and you need a plan. Whatever the reason, refinancing a car loan is often worth a look. It’s also easy to get wrong, because a lower repayment can hide a higher total cost.
What does refinancing a car loan actually involve?
You take out a new loan, and the new lender uses it to pay out your existing loan. If it’s a secured car loan, the old lender’s interest in the car is released and the new lender’s is registered. From then on you repay the new lender, on the new loan’s terms.
Common reasons to refinance:
- Lower total cost, because your circumstances or credit history have improved.
- Escaping a loan with poor features, such as high monthly fees or no extra repayments.
- Dealing with a balloon payment that’s about to fall due.
- Changing the repayment to fit a new budget, with the trade-offs understood.
How do you work out whether it’s worth it?
It comes down to one comparison: what you’d pay if you stay, against what you’d pay if you switch.
| Stay | Switch |
|---|---|
| Remaining repayments on your current loan | Payout figure for your current loan (including any early exit fee) |
| Any balloon still to come | New loan establishment fee |
| Ongoing monthly fees | All repayments on the new loan |
| Any balloon on the new loan | |
| Ongoing monthly fees on the new loan |
If the switch column adds up to less, refinancing saves money. If it adds up to more, it only makes sense for another reason you’ve weighed up, such as needing lower repayments for a while.
Start by asking your current lender for a payout figure with a date, and ask whether an early repayment fee applies. Moneysmart notes fixed-rate loans can carry early repayment costs, while variable loans usually don’t.
What’s the catch with lower repayments?
Time. Spreading what you owe over a longer term lowers each repayment, but you pay for longer. Moneysmart’s refinancing guidance shows how a lower rate over a much longer term can still add up to more in total.
With a car there’s a second catch: the car keeps ageing. Stretching a loan so it outlasts the car’s useful life means you could be repaying a car you’ve already replaced. As a rule of thumb, aim for the new loan to end well before you expect to need another car.
Run your numbers through the car budget planner to see what repayment your budget can comfortably carry, then compare that with any refinance quote. When you’re ready, you can see refinance options before you commit.
How should you handle a balloon payment?
A balloon is a lump sum left owing at the end of the loan. If yours is coming up, you’ve got four broad options:
- Pay it from savings.
- Sell or trade in the car and use the proceeds to clear it.
- Refinance the balloon into a new loan over a fresh term.
- A mix, such as part-paying from savings and refinancing the rest.
Start planning months ahead, not weeks. If you refinance, the car’s age and value at that point affect what’s possible, and a shorter new term keeps the total cost down.
When is refinancing not the answer?
If you’re already behind on repayments, refinancing may not be available, and adding a new loan won’t solve an income problem. Contact your current lender first and ask about a hardship variation, which Moneysmart describes as a change to the loan’s terms to make it easier to manage, such as more time to pay or a temporary pause. Our guide to falling behind on car loan repayments explains the steps, and the free National Debt Helpline (1800 007 007) can help.
If you’ve got several debts besides the car, debt consolidation may be worth comparing too.
What will a new lender look at?
The same things as any car loan: your income, expenses, credit report and the car as security. If your credit has improved since you took the original loan, that’s a good reason to compare. If it has worsened, refinancing may cost more. Our page on bad credit car loans covers what helps.
What paperwork makes a refinance quicker?
Having these ready shortens the process:
- a recent statement for your current car loan;
- a written payout figure with a valid-until date;
- the car’s registration details and VIN;
- recent payslips or other proof of income;
- recent bank statements; and
- details of any other loans and credit cards.
If your loan has a balloon, include the balloon amount and its due date. The new lender needs the full picture to give you an accurate comparison.
Time to compare?
If the numbers suggest switching could save you money, or you need a plan for a balloon, start an application with our secure partner. You’ll see your options before you commit, and you can hold them up against your current loan’s payout figure. A real person can help with the comparison. Please give accurate income, expense and loan details, so the comparison you make is a fair one.
Frequently asked questions
Can I refinance my car loan with a different lender?
Yes, as long as you qualify. The new lender pays out the old loan and takes over as the lender, usually with the car as security.
Are there fees to refinance a car loan?
Often. Your current loan may have an early payout fee, especially if it's fixed rate, and the new loan may have establishment and monthly fees. Add them all up before switching.
Should I refinance to lower my repayments?
Only if you understand the trade-off. Moneysmart shows that a lower rate over a longer term can still cost more in total. Lower repayments are useful in a squeeze, but check the total amount payable.
What if I have a balloon payment coming up?
Plan early. Options include paying it from savings, selling or trading the car, or refinancing the balloon amount. Compare the total cost of each.
Can refinancing help if I'm struggling with repayments?
It might, but first contact your current lender about a hardship variation. The National Debt Helpline on 1800 007 007 offers free financial counselling.