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?
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.
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.
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!