Refinancing a Car Loan: When It Makes Sense

Refinancing a car loan means replacing your existing loan with a new one, usually with a lower interest rate. It is one of the simpler forms of refinancing and can result in meaningful savings on the remaining interest cost. However, it is worth doing only when the numbers genuinely favour it.

When Refinancing Makes Sense

Refinancing a car loan tends to work best in the following situations:

• Your credit score has improved significantly since you took out the original loan, qualifying you for a materially lower rate.
• Interest rates in the market have fallen since your original loan was arranged.
• You accepted dealer finance at the point of purchase and did not shop around. Dealer finance rates are often higher than what other lenders offer, particularly for borrowers with good credit.
• The remaining loan term is still long enough that the interest savings justify any fees involved.

When Refinancing Is Less Likely to Help

Refinancing makes less sense if you are well into the loan and most of the interest has already been paid. Because of how amortisation works, the largest share of interest falls in the early repayments. If you are in the final year or two of a loan, the remaining interest is modest and the savings from a lower rate may not offset any fees. Also consider whether your existing loan has early repayment penalties.

How to Refinance

The process is straightforward. Obtain quotes from other lenders based on your current outstanding balance, remaining term, and vehicle details. Compare the APR and total cost against your current loan. If a better offer is available, apply with the new lender. On approval, the new lender pays out the existing loan and your repayments begin with the new lender. The vehicle registration of security interest is transferred accordingly.

Calculating the Saving

To assess whether refinancing is worthwhile, calculate your remaining total repayments under the current loan and compare them to the total repayments under the proposed new loan, including any fees. If the new loan costs less in total, refinancing makes sense. Factor in any early repayment fee from your existing lender and any establishment fee on the new loan.

Keeping the Same or Shorter Term

When refinancing, resist the temptation to reset the loan to a longer term just to reduce monthly repayments. Extending the term means you pay interest for longer and the total saving from the lower rate may be eliminated. Ideally, refinance to the same or shorter remaining term and simply enjoy the lower rate.

Key Takeaway

Refinancing a car loan is worth considering if your credit has improved, rates have fallen, or you accepted dealer finance without shopping around. Calculate the total cost under both the old and new loan before committing, and keep the loan term the same or shorter to maximise the benefit.