How Does Car Loan Refinancing Work? 7 Steps Explained

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.

What Happens When You Refinance a Car Loan?

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:

1. Reviewing your existing car loan
2. Requesting a current payout figure
3. Checking your eligibility
4. Applying for the replacement loan
5. Providing supporting documents
6. Receiving formal approval
7. Settling and closing the original loan

Each stage is explained below.

Step 1: Review Your Existing Car Loan

Before considering a replacement loan, it helps to understand exactly what you currently have.

Review your loan agreement or recent statement and identify:

• Your current interest rate
• Your regular repayment amount
• Your remaining loan term
• Your estimated outstanding balance
• Whether the loan has a balloon or residual payment
• Early payout or termination fees
• Any account fees or other ongoing charges

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.

Step 2: Request a Current Payout Figure

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:

• The remaining principal
• Interest accrued since your last repayment
• Early termination or payout fees
• Outstanding account charges
• A balloon or residual amount, where applicable

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.

Step 3: Check Your Eligibility

The next stage is to assess whether you may qualify for another loan.

Eligibility can depend on factors such as:

• Your income and employment
• Your regular expenses and existing debts
• Your repayment history
• Your credit profile
• The amount still owing
• The age, type and value of the vehicle
• The remaining term of your current loan

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.

Step 4: Assess the Proposed Loan Structure

Once potential options have been identified, the proposed replacement loan should be considered alongside your current agreement.

Important points to review include:

• The interest rate
• The comparison rate, where provided
• Weekly, fortnightly or monthly repayments
• Establishment and ongoing fees
• Early repayment conditions
• The proposed loan term
• The total amount repayable
• Any balloon or residual payment
• Whether the rate is fixed or variable
• Whether the vehicle will be used as security

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.

Step 5: Submit the Application and Documents

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:

• Proof of identity
• Recent payslips or other proof of income
• Bank statements
• Employment details
• Information about your living expenses
• Your existing loan statement
• A current payout letter
• Vehicle registration or identification details

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.

Step 6: The Lender Assesses the Application

The lender then completes its assessment.

This may involve checking:

• Whether the repayments appear affordable
• Your credit history
• Your conduct on the existing loan
• The vehicle’s age and value
• The amount being refinanced
• The information in your supporting documents
• Whether the proposed loan meets the lender’s criteria

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.

Step 7: The New Loan Is Approved and Settled

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.

What Happens After Settlement?

After settlement:

• Your old car loan should be closed
• Your new repayment schedule begins
• Repayments are made to the new lender
• Any new direct debit arrangements take effect
• You should receive confirmation or statements for the new account

It is worth checking your old loan account after settlement to make sure:

• The payout has been received
• The balance has been reduced to zero
• No further payment is due
• Any existing direct debit can be cancelled safely

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.

How Long Does the Refinancing Process Take?

The timeframe can vary.

A straightforward application with complete documents may progress relatively quickly. The process can take longer if:

• Additional documents are required
• The lender needs further income verification
• The payout letter expires
• Information in the application needs clarification
• There are delays obtaining details from the current lender
• The vehicle or loan structure requires additional checks

Providing complete and accurate information at the beginning can help reduce avoidable delays.

Can You Refinance With the Same Lender?

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.

What If the Car Is Worth Less Than the Amount Owing?

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:

• Contributing funds to reduce the balance
• Refinancing only part of the amount
• Using a different loan structure
• Waiting until the outstanding balance has reduced

Approval is not guaranteed, and the available approach will depend on the lender’s criteria.

What Happens to a Balloon Payment?

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.

Does the Original Loan Close Automatically?

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:

• The previous lender received the correct amount
• The account balance is zero
• The account is marked as closed
• No unexpected fees remain
• Any security interest has been dealt with
• You will not be charged another scheduled repayment

Keep your settlement confirmation and final account statement for your records.

Common Delays During Car Loan Refinancing

Some of the most common causes of delay include:

An expired payout letter

Because payout figures are usually calculated to a particular date, a revised letter may be needed if settlement does not occur in time.

Missing or inconsistent documents

Differences between an application and the supplied documents may require additional explanation or verification.

An outstanding loan condition

The lender may require another payslip, bank statement, insurance document or vehicle detail before issuing final approval.

Vehicle information problems

Incorrect registration, VIN or ownership details can delay the establishment of the replacement loan.

Continuing to change the application

Changing the requested amount, loan term or structure after assessment has started may require the lender to review the application again.

Car Loan Refinancing Process Checklist

Before beginning the process, gather the following:

• Your current loan agreement or statement
• Your current interest rate
• Your remaining loan term
• Your repayment amount
• A recent payout figure
• Details of any early termination fees
• Proof of income
• Identification
• Relevant bank statements
• Vehicle registration and identification details

Having these available can make it easier to understand the current loan and complete the new application.

Ready to explore your options?

You can check your eligibility online with Ausloans in minutes, with no impact on your credit score and no obligation to proceed.

Get Started