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Car Loan Refinance | What Does It Mean and How You Can Benefit From It

Apr 20, 2022 3:28:55 PM

Many financially wise Australians refinance their car loans to boost their savings. Refinancing your car loan might be the answer whether you’re stuck paying for a bad deal or want greater control over your existing loan.

Car loan refinancing aims to compare new loans and renegotiate better terms on your current car loan repayments. You might switch to a new lender if your current one doesn’t offer you the loan features you want. Car owners across Australia are taking advantage of loan refinancing.

Read on to discover what refinancing means and how you might benefit.

What Does It Mean to Refinance?

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You may be in a better situation financially now than you were when you first took out your car loan. Whether you had a poor credit score—or no score at all—or you’ve had a chance to build up your savings, you might be eligible for better loan terms and rates than before. Even after a few repayments, your creditworthiness should improve.

Refinancing means replacing the existing terms of a car loan with a new one. To refinance your car loan, look at loans available on the market. Compare other credit products with your current car loan repayments to get a good idea of what you’re eligible for. Speak to your existing lender about renegotiating your loan terms. Alternatively, apply for a new loan with a different lender.

How Does Refinancing Work?

The lender will re-evaluate your financial circumstances and loan application. Before approaching your lender, set yourself a clear and achievable goal. If you plan to get the lowest interest rates possible, you’ll likely end up disappointed. Whereas, if you want to reduce your interest rate by 0.5%, you’ll have more negotiation power and feel satisfied. 

You might refinance to get additional features that help you repay your car loan, such as an offset account. You can also refinance home loans, personal loans, or student loans.

Is It Worth It to Refinance?

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Refinancing isn’t for everyone. If you’re comfortable with your car loan repayments or your financial situation hasn’t changed since taking out the loan, it might not be worth the hassle. However, if you think you might reduce your interest rate by as little as 0.5% or even 0.25%, you could make incredible savings.

Say you have a remaining car loan balance of $30,000 with an interest rate of 6.49% and five years remaining. Your overall interest repayments would be $6,920 with monthly payments of $782.

However, under the same circumstances, if you reduce your interest rate to 6%, your total interest would equal $6,380. You would pay $773 a month. The extra $11 a month free could significantly affect your long and short term expenses.

Pros and Cons of Refinancing Your Car Loan

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Refinancing could end up costing you more if you’re not careful. Moreover, without clear goals, it may not be worth the effort. Consider the pros and cons of refinancing your car loan before approaching your lender.

Benefits of Refinancing Your Loan

  • Lower interest rates: The most common reason people refinance is to reach lower interest rates. Lowering your interest repayments can help you make savings in the short term and reduce the overall amount you pay towards your loan.
  • Longer loan term: If you’re struggling to meet your monthly repayments, you can reduce them by extending your loan term. Each repayment is lower because the lender divides the principal by more monthly repayments.
  • Add or remove a co-signer: You might want to add or remove a co-signer to your loan to get a better interest rate.
  • Switch to a new lender: If your current lender is difficult, you might improve your circumstances by going to a new lender.
  • Loan features: You can switch to a fixed, variable, or interest-only car loan.

Drawbacks of Refinancing Your Loan

  • More total interest: If you negotiate a longer loan term to reduce your monthly repayments, you might pay more interest overall on your car loan.
  • Entry and exit fees: If you switch lenders, you might have to pay new loan application fees and exit fees for leaving your old loan.
  •  You might not end up with a better deal: If you don’t set yourself a clear goal of what you want from refinancing, you might not end up with a better deal. Speak to a finance broker to ensure you get a good deal on your next loan.

When Should I Refinance?

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Depending on your lender and car loan terms, it might not make sense to refinance your car loan early. For example, if you have exit fees, you may lose more money than you save. So, when does it make sense to refinance your car loan?

  •  If you have a bad loan deal. Car owners who get financing through a dealership often end up with high-interest rates and additional fees. The sooner you refinance to a lender with lower rates, the better.
  • Your credit score has improved. After a few months or a year of making timely repayments on your car loan, your credit score should jump up a few points. Therefore, you’ll have better borrowing power.

Does Refinancing Hurt Your Credit?

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Whenever you take on new debt, the lender will conduct a hard inquiry into your credit report. Generally speaking, this won’t hurt your credit score too much. It may dip a few points, but it will bounce back quickly when you make a few monthly repayments on time.

However, if you apply for many car loans within a short space of time, your credit score may take a hit. Car loan application rejections leave a black mark on your credit report, which may affect future refinancing. Therefore, speak to a broker to ensure you’ll get pre-approval on your car loan refinance.

Can I Refinance a Car of Any Age?

refinance-car-loan-07aMost lenders will limit refinancing loans on cars over ten years with high mileage. This is because the car value isn’t high enough to act as security. Watch out if you have a used car, as some lenders may not allow you to refinance your loan.

Can I Refinance if I Have Bad Credit?

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Yes, you can refinance your car loan if you have bad credit. However, it may put you at a disadvantage. The lender is unlikely to look favourably on your application if your credit score is the same or lower than when you first took out the loan.

If you want to refinance to reduce your monthly repayments by lengthening your loan term, speak to a car finance broker who will advise you on bad credit loan applications.

How Much Can a Car Refinance Save Me?

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Depending on your refinancing deal, you might save hundreds of dollars on your car loan. We’ve already seen how negotiating better interest rates might save you $11 a month and $540 over five years on a $40,000 remaining loan balance. Well, what if you were to introduce an offset account with the same facts and a 6% interest rate? You could make even more significant savings.

An offset account allows you to deposit and withdraw money like a regular transaction account. However, the money in the account is offset against your interest owed. For example, if you were to keep about $5,000 in your offset account, you could shave two months off your car loan and save $238.28 in interest.

Requirements to Refinance

If you wish to refinance your car loan, you will need to meet the following criteria:

  •  Have evidence of a good track record of paying your car loan repayments on time.
  • Be at least six months into your current loan (most lenders will not allow you to refinance any earlier).
  • Have a good credit score—or at least a more substantial score than you had initially.
  • You need to be an Australian citizen or permanent resident.

What Documents Do I Need?

When you submit your car loan refinancing application, you’ll need to share some documents with your new or existing lender. If you stay with the same lender, they may already have some of the information on file. A new lender will be like starting all over again; you’ll need to submit all your loan documents.

Gathering everything before starting the application will ensure everything goes more smoothly. You might need to share:

  •  A copy of your driver’s licence
  • Vehicle registration
  • Proof of car insurance
  • Proof of income and other financial documents
  • Proof of residence
  • Vehicle identification number (VIN)

Where to Refinance - Car Loan Aggregator

Going directly to the lender might get you a good deal if you have built up a relationship with them. However, if you’re opting to refinance with a new lender, a car loan aggregator will help you reach better terms. With a range of lenders on our panel, we’ll help you put together a robust application and refinance your car loan with the best deal for your situation.

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