Refinancing a car loan means replacing your current car loan with a new loan.
Instead of continuing to make repayments to your existing lender, the new loan is generally used to pay out the amount still owing on your current loan. Once that process is complete, you begin making repayments under the terms of the new agreement.
Although refinancing is often described as “switching loans,” several steps need to happen behind the scenes. These include confirming your payout balance, assessing your application, approving the replacement loan and settling the amount owed to your existing lender.
This guide explains the car loan refinancing process step by step.
Looking to compare options rather than learn about the process? Visit our car loan refinance page to check your eligibility and explore options from our lender panel.
When you refinance, you do not simply change the interest rate attached to your existing agreement.
A new loan is established, usually with a different lender. The new lender provides enough finance to pay the outstanding balance on your current loan, subject to approval and the final loan amount.
Your original loan is then closed, and you begin making repayments to the new lender.
The process generally involves:
Each stage is explained below.
Before considering a replacement loan, it helps to understand exactly what you currently have.
Review your loan agreement or recent statement and identify:
This information gives you a starting point for assessing whether changing loans could improve your position.
A lower advertised rate does not automatically mean a better outcome. Establishment fees, payout costs and changes to the loan term can all affect the overall cost.
Your account balance and your payout figure may not be exactly the same.
A payout figure is the amount required to close your current loan on a specified date. It may include:
Payout figures are commonly valid for a limited period because interest can continue to accrue each day.
Your current lender can provide a written payout letter or statement showing the amount required and the date until which it applies.
Having an accurate payout figure helps ensure the replacement loan is structured for the correct amount.
The next stage is to assess whether you may qualify for another loan.
Eligibility can depend on factors such as:
The vehicle’s current value can be particularly important for a secured car loan. If the amount owing is significantly higher than the vehicle’s value, refinancing the full balance may be more difficult.
An initial eligibility check may help identify potentially suitable options before a formal application is submitted.
Ausloans uses a soft credit pre-check during the initial eligibility stage. This does not affect your credit score. A formal application submitted to a lender may involve a hard credit enquiry.
You can read more in our guide to how car loan refinancing may affect your credit score.
Once potential options have been identified, the proposed replacement loan should be considered alongside your current agreement.
Important points to review include:
Pay particular attention to the term of the replacement loan.
Extending the term may reduce each repayment, but it could also mean paying interest for longer. A shorter term may increase regular repayments while reducing the total interest paid.
The most suitable structure will depend on your budget and priorities.
Once you decide to proceed, a formal application is submitted to the proposed lender.
The lender will usually request documents to verify the information in your application. These may include:
Self-employed applicants may be asked to provide additional business or financial documents.
The exact requirements can vary depending on the lender, loan structure and applicant profile.
The lender then completes its assessment.
This may involve checking:
The lender may ask for further information or updated documents before making a final decision.
Conditional approval is not always the same as formal approval. Any outstanding conditions generally need to be satisfied before settlement can occur.
Once the application receives formal approval and the loan documents have been completed, settlement can be arranged.
During settlement, the required funds are generally paid directly to the existing lender using the details in the payout letter.
The original lender then applies the funds to the outstanding account and closes the old loan.
For a secured loan, the lenders may also need to update the security arrangements attached to the vehicle. This can involve releasing the previous lender’s interest and registering the new lender’s interest.
You should not assume the old loan has been closed until settlement has been confirmed.
After settlement:
It is worth checking your old loan account after settlement to make sure:
Avoid cancelling the old direct debit before settlement has been confirmed. Doing so too early could result in a missed payment if settlement is delayed.
The timeframe can vary.
A straightforward application with complete documents may progress relatively quickly. The process can take longer if:
Providing complete and accurate information at the beginning can help reduce avoidable delays.
You may be able to ask your current lender whether it can offer a different rate or loan arrangement.
However, changing the terms with the same lender is not always treated as refinancing. The lender may offer a variation, retention rate or new internal product instead.
A true refinance generally involves establishing a new loan that pays out and replaces the existing agreement.
Comparing the current lender’s offer with other available options can provide a clearer view of whether changing the loan is worthwhile.
This situation is sometimes called negative equity.
For example, you may owe $28,000 while the vehicle is currently valued at $23,000. The loan balance is therefore $5,000 higher than the vehicle’s value.
This can make refinancing more complicated because a secured lender may not be prepared to lend the full amount against the vehicle.
Depending on the lender and your circumstances, possible outcomes could include:
Approval is not guaranteed, and the available approach will depend on the lender’s criteria.
If your current loan includes a balloon or residual payment, that amount will normally form part of the total payout figure.
The replacement loan may be structured to cover it, subject to approval.
The new loan could also include another balloon payment, but this is not automatic. Whether one is available will depend on the lender, the vehicle and the proposed structure.
A balloon can lower regular repayments, but it leaves a larger amount to be paid or refinanced at the end of the term.
The original loan should be closed as part of settlement once the existing lender receives the full payout amount.
However, it is sensible to confirm this directly.
After settlement, check that:
Keep your settlement confirmation and final account statement for your records.
Some of the most common causes of delay include:
Because payout figures are usually calculated to a particular date, a revised letter may be needed if settlement does not occur in time.
Differences between an application and the supplied documents may require additional explanation or verification.
The lender may require another payslip, bank statement, insurance document or vehicle detail before issuing final approval.
Incorrect registration, VIN or ownership details can delay the establishment of the replacement loan.
Changing the requested amount, loan term or structure after assessment has started may require the lender to review the application again.
Before beginning the process, gather the following:
Having these available can make it easier to understand the current loan and complete the new application.