Should I Refinance My Car Loan?

The short answer is – it’s worth checking!

Every loan is different and whether you can save money by refinancing the loan is going to depend on things like:

  • How long is the loan contract?
  • How far through the loan contract are you?
  • Does your lender charge fees to let you out of the contract (break costs)?
  • What is the interest rate on the loan?
  • Do you use the car for business or personal use?
  • Has your financial situation changed since you took out the loan?

Driving at Night

Let me give you an example:

John had originally bought a new car and he’d had the loan for about two and a half years.  He’s self employed and uses the car for his business.  He was making his monthly repayments but thought he’d check on whether it was worth refinancing the loan.  So he asked – ‘Should I refinance my car loan?’ and here’s what happened.

When the loan was reviewed it turned out that he was nearly at the end of his New Car Warranty period and the free servicing was also coming to an end.  So it was about to start costing him more to keep the car because of service costs and any additional repairs.

The interest rate that his loan was on was also a lot higher than the current rates.

So it ended up that rather than refinancing the loan, John upgraded his car – so he got a new car with a new loan on a lower interest rate.

This meant that he:

  • Got the free servicing on his new car, so he didn’t have to pay anything for car servicing
  • Was under a New Car Warranty again, so didn’t have to pay anything for repairs
  • Claimed the GST upfront
  • Got maximum tax benefits again (after nearly reaching the maximum limit on the older car)
  • Got a much lower interest rate!

So that was definitely worth refinancing!

How about if you don’t have a business but you have a car loan?

Instead of looking to achieve tax benefits like someone who uses the car for business, when it’s your family car there are a couple of different things you might want to achieve by refinancing your car loan. Let’s run through them so you can see which one (or ones) applies to you – and this will help us understand what you want to achieve if you ask us to find a better deal for you:

Reduce Your Monthly Repayments  This is the thought that most people have before they ask us for a quote on refinancing.  Let’s face it, if you can reduce how much you spend each month on car loan repayments it leaves more money in the household budget to do other things with. Maybe that’s saving for a home deposit, paying off your home loan faster, paying off your credit card or saving for a holiday.

Should I refinance my car loan?

Your monthly repayments can be reduced by 2 different methods – either getting a lower interest rate or getting a longer loan term, or you can do both.  If you need to reduce your repayments quickly, the best way is to extend how many months you’re paying back the loan on the car.  The problem with this is you might end up paying more for your car overall than you would if you didn’t extend the loan.  The benefit is that it reduces your monthly repayments

Reduce the Interest Rate   If your credit rating has improved since you took out the loan, or your circumstances have changed so that the lender will see you as a lower risk (maybe your employment is more stable, your pay has increased, you’ve paid off other debts) then you can often achieve a lower interest rate.  This reduces the total interest you’re paying on the loan.

Get a Loan for the Balloon Payment  If you took out the original loan with monthly payments and then a balloon, or lump sum, payment at the end of the agreed loan term you might want to refinance as you get near the date when you have to pay the balloon payment.  When you get to the end of the loan term you could pay the balloon payment if you have the cash, or you could refinance the balloon amount so that you don’t have to pay a lump sum.

Balloon Payments!

Change the Borrowers on the Loan  Maybe circumstances have changed since you took out the car loan and now you want to change the names on the contract.  Refinancing gives you a new loan with new names on it so it can be a good time to change the arrangements.

Let’s run through another example:

So let’s say you bought a car 12 months ago for $20,000.  Your loan was at 6% interest and you agreed to pay it back over four years.  So your repayments are $470 per month and at the end of 4 years you would have paid a total of $470 x 48 months =  $22,560. To keep it simple I have ignored any fees in this example.

But one year into the loan you decide that you want to reduce your monthly repayments.  You find a new lender that will pay off your old loan and give you a new loan at 4% interest with a loan term of 4 years.  You have already paid one year of the original loan ($470 x 12 months = $5640). So the remainder is $16,920 ($22,560 – $5,640).  We refinance the remainder over a new 4 year term at 4% and the new repayments are $382 per month.  Over the new 4 year term you would pay a total of $18,336 ($382 x 48 months).

Now with the new loan this means that overall you will be paying off the car loan for a total of 5 years.  So the total you pay is $5,640 + $18,336 = $23,976.

SO just looking at the repayments, you would go from paying $470 each month down to $382 which means an extra $88 per month in your pocket.   If you want to reduce your monthly costs this can be a very effective way to do it.  Just be aware that overall, since it is now a 5 year loan, you may be paying more.  Of course, everyone’s loan and circumstances are different and everyone’s goals with refinancing can be different.  That’s why checking with a range of lenders to find the best deal for your circumstances is so important.

Shop Around – Do it Yourself or We Can Help!

Ask questions when looking at refinancing, shop around for the best loan and make sure the new loan achieves what YOU want.

If you would like us to shop around for you we offer an obligation free check to see whether refinancing your car loan is worthwhile for you.  Just visit my Enquiry Page and fill out brief details so I can have someone get in touch with you to get the details of your current circumstances and very soon we can tell you what your options are.  Easy!!

Did you know you could refinance a car loan? Have you had experience with refinancing one?  If so, please share below – we’d love to hear from you!

4 Replies to “Should I Refinance My Car Loan?

  1. Hi Rachel, thanks for the very informative sharing on car loan refinancing. Getting a lower monthly repayment is a good way to ease the burden, although we end up paying more by the end of the loan term. Previously, I didn’t aware about this refinancing option when I bought my car. After I find out this, the loan has almost come to an end. I am still single that time, still able to cope with the monthly repayment. If I were to do the same now, with my wife and kids, I would go for monthly repayment to reduce monthly expenses

    1. I’m glad that you learned something! Refinancing can be a really useful tool when it’s used to change a loan to something that works better for your circumstances and goals. As you said, now with a wife and kids you may use refinancing as an option to reduce loan repayments, which were previously not a problem when you were single. There’s always the other option of course – a couple who find out that they are going to have a child or some other event that reduces their income (maybe a redundancy, reduction in hours, surgery, etc) could refinance their car loan to shorten the term and increase the repayments so they could pay it off before the event takes place. That way when their income is reduced they have already paid off the car loan debt.

      Thanks for sharing IllusiozTan!

  2. Hi Rachel. I have worked in the debt industry for over 20 years and have seen the impact borrowing money can have on people’s lives. As you mention, it is really important to educate people about how much they will be paying back overall, as an inflated debt level can way heavy on a persons credit file. It’s very easy for someone to be drawn in by the low monthly payments without considering the bigger picture.

    1. Absolutely Daniel! I see far too many people trying to get a loan for their first home and finding out that they can’t get one because they have a big car loan debt. Often people go to buy a car, take whatever finance is offered to them, and then find that it stops them moving forward financially for years to come. They really need to find out what the costs are and for how long, and then consider whether that works with their other plans. A car is a necessary evil in some ways – most of us can’t do without them, but they lose value over time. When buying a car for a business this isn’t so important because it can be a tax deduction but if the car is just for personal use, then finding the best loan product that fits in with your life plans (and can cope with any unexpected events!) is vital.

      Thanks for sharing!

      Rachel

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