Refinancing Your Car Loan vs Staying Put: When It Actually Pays to Switch

From time to time, when you’re paying off a car loan, you might wonder whether the lender you’re with is still the most appropriate fit for you. Maybe you’re wondering whether you will lower your repayment with a loan from another lender, or whether you might be able to save on interest.

Switching to another lender can sometimes be an idea worth pursuing, but it isn’t always the right move. Whether it makes sense will depend on a lot of factors, including how much is owing on your loan, the time you have left on your loan term and any fees that could be charged if you want to repay the loan early. Sometimes refinancing to another lender may reduce your costs, but other times it is more sensible to stay put.

Here, we’ll explain what you can think about if you’re weighing up the decision and how you can compare your options.

Is refinancing your car worth it?

Refinancing in this context refers to moving from one lender to another. Generally, this is done by applying for a loan from another lender and using the money to repay the existing debt. The loan is then repaid to the new lender.

Sometimes, this can be a sensible idea, but it isn’t always the right move. It depends on whether the overall savings outweigh the cost that can come with switching. The key rule is to look at the total savings that may be available over the remaining term of the loan versus the costs of refinancing.

If you’re currently paying a high interest rate on your car loan, and your financial position has improved a lot since you took out the loan or you have plenty of loan term left, it’s more likely to work. But if you’re near the end of your loan term, you have a small balance, or there are high exit and establishment fees involved in a move, it may be less attractive.

How to tell if switching could save you money

Work out the break-even point.  

To work out whether you could save money refinancing, you’ll need to work out the break-even point. This is where the savings you could make cover the cost of switching. Usually, there are three things that go into this: The interest rate you’re currently paying, the new rate you’re being offered by another lender and the fees that might be involved.

The interest rates alone won’t tell you the full story. You may also be charged fees to exit your existing loan early, and there may be establishment fees charged on the new loan. These all need to be factored in when you’re working out whether there is money to be saved.

For example, if you borrow $15,000 at an interest rate of 18.85 percent over 48 months, you may pay $109 a week and a total of $22,656. If you can reduce the interest rate to 13.05 percent, you could clear the loan over the same period of time with weekly repayments of $98 and a total cost of $20,400. That’s a saving of more than $2000 in interest. These calculations include establishment fees of $820, but there may also be a break fee charged to repay your loan early. This is usually calculated based on how long your loan has left to run and the interest you are committed to paying over that time. Depending on how large that fee is, you may not save as much as you expect. This is just an example for illustrative purposes. If you are thinking about refinancing, we can help you look at how it might work for you.

Use a loan repayment calculator

Before you decide on your next steps, you may be able to get an idea of what your options may look like by running your numbers through our loan repayment calculator. This can be a way to compare your current repayments and total borrowing cost to the likely scenario of other loan offers. Remember, though, that this will just show you what the repayments might look like but does not include the cost of exiting a loan early.

When refinancing may be worth considering

Refinancing may be a sensible idea in some of these scenarios. Remember, this is just a guide, and it’s always worth looking at what might work for your own situation.

You’re paying a high interest rate

If you took out your loan when interest rates were generally higher, or when you had poorer credit, you may be paying more in interest than you would pay if taking out the loan now. Depending on the length of your loan term remaining, even a small drop in your rate could save you money.

Your financial situation has changed

If you’ve got better credit, a higher income, or fewer commitments than when you took the loan for your car, you may find you have more options than you previously did. This may mean you can qualify for a loan that will cost you less money.

You want lower repayments

Refinancing to a longer term can lower your repayments. This often means you pay more in interest over the life of the loan, though. You may be able to ask your existing lender to consider these sorts of changes, and you may not need to refinance.

You want to pay off your loan sooner

You might refinance to a shorter term, which may reduce the overall interest bill. Again, you may not need to move to another lender to do this.

When staying might be a better option

You’re near the end of your loan term

If you haven’t got a lot of time left on your loan, there may not be as much money to be saved, and you’ve usually paid most of the interest already because, with a fixed repayment loan, your early payments are primarily interest, and the principal being repaid grows over time.

The costs outweigh the savings

You may find that with establishment fees, early repayment or exit fees, security registration fees and other lender charges, you don’t stand to save as much as you expect.

Extending the loan term usually costs more overall

Lower repayments don’t necessarily mean lower borrowing costs. If you’re stretching your loan term, you could end up paying more overall. It’s important to compare the total cost of borrowing, not just the regular repayments.

What costs should you compare before switching?

Refinancing is about a lot more than just the advertised interest rate you’re expecting to pay. You’ll need to consider establishment fees for your new loan, early repayment or exit fees for your existing one, PPSR or security registration fees and any other ongoing fees.

Make sure you’re comparing the total interest that you’ll pay, the total loan cost and total repayments.

Can you refinance if you're in negative equity?

If you owe more money than your car is worth, you may be wondering what that means for your loan. This situation is referred to as negative equity, and can happen when the value of a vehicle drops more quickly than the owner can repay the loan balance.

It doesn’t automatically mean you can’t refinance your car loan, but it may give you a few things to think about. Your options vary depending on your lender and your personal circumstances, but we can talk to you about what may be possible.

How soon can you refinance a car loan?

There’s no set answer to when you can refinance a loan. Lenders look at each application on its merits. Timing can depend on your existing loan, your balance, credit profile and how affordable the loan will be for you.

If you’re thinking about refinancing because you’re experiencing hardship, it may be sensible to approach your existing lender in the first instance. They have a legal obligation to consider ways that they may be able to help borrowers who have struck unexpected financial hardship.

Does refinancing affect your credit score?

Lenders may run a credit check when they assess your application, and this does show up on your credit history. While the act of refinancing on its own won’t materially damage your credit score, having a number of applications in a short period of time can leave a mark that may make lenders hesitate. We can help you to consider which lenders may be an appropriate fit before you apply, to reduce your need to shop around.

Refinancing your car loan with better finance™ 

Better finance™ is a licensed Financial Advice Provider, and we work with a panel of lenders to help you compare suitable refinancing options. We can help you before you start the application process, with personalised guidance to help you determine what might be suitable for your circumstances. You can ask us for a no-obligation quote, use the tools we have on our website, or read about how refinancing works on our website.

Frequently Asked Questions (FAQs)

When should I refinance my car loan?

There is no right answer. Refinancing may make sense when the potential savings outweigh the costs of a move.

Can refinancing reduce my monthly repayments? 

It can do so if you move to a lower interest rate or a longer loan term.

Does refinancing always save money? 

Not always, and it’s important to understand the total costs involved in all the options you’re considering.

What costs should I compare before refinancing? 

Compare the interest rates offered, the exit fees involved in leaving your existing loan agreement early, any establishment fees for the new loan, and the total cost of borrowing in both scenarios.

Can I refinance if I have negative equity?

You may be able to. We can help you look at your options.

How soon can I refinance my car loan?

There’s no one right answer. If you want to talk about what might be appropriate, our team can help.

Does refinancing affect my credit score?

Making a number of applications within a short period of time may affect your credit score. We can help you narrow your search to the lender that is likely to be a fit.

Can I refinance dealer finance?

Yes, you may be able to refinance dealer finance

Can I refinance if I have negative equity?

You may be able to. We can help you look at your options

Can I refinance with the same lender?

Yes, this is often a good option to explore as a first step, particularly if you are in a position of financial hardship.

How do I know if refinancing is right for me?

You’ll need to weigh up the costs involved against the potential savings. As long as it tips over the “break-even” point where there are more savings to be had than costs to be paid, you may decide refinancing is worth pursuing.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.