Refinancing Your Car Loan – Everything You Need To Know

Refinancing your car loan: is it the right choice? That is the question. Has there been a change in your personal or financial situation? Are you simply seeking a better deal than the one you’ve got? Refinancing may be an option for you. Read on as Monzi explores and explains everything that you need to know. Let’s go.

Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.

What does it mean to refinance?

Refinancing is the act of taking out a new loan to pay off an existing loan. It may allow you to unlock equity, secure a better deal, or pay off debts. The main goal of refinancing is to reduce the repayment amount or receive lower interest rates.

Generally, when refinancing, you want to increase, decrease, or keep the loan the same.

Increasing the loan amount

Increasing when refinancing means that you will consolidate more debts and increase the repayment time. This, then lowers the monthly interest but increases the overall amount paid.

Decreasing the loan amount

Decreasing the amount may reduce the loan term, and lessen the interest. Depending on what you want to do, refinancing may not be necessary to lower your loan amount.

Maintaining the loan amount

If you are maintaining your amount, it suggests you are searching for a better offer. The definition of a better offer is dependent on your circumstances. You may have increased your credit score and are now able to secure a better deal. Or perhaps you want to take advantage of the market condition and change a fixed or variable rate on your loan.

Regardless of the reason, maintaining the amount and making a change to benefit your financial profile is often a smart decision.

Case study – Chelsea wants to refinance

Chelsea has a car loan on a new vehicle of $20,000 with a six per cent interest rate for five years. Meaning her estimated monthly repayments are approximately $343. She wants to decrease the time it will take her to pay off the loan by two years. As a result, Chelsea will be looking to refinance her car loan at the same interest rate. However, it will only take her three years to pay off, which makes Chelsea’s monthly repayment approximately $532 a month.

You can potentially refinance like Chelsea and decrease the loan term, or you can change a different aspect of the loan. Whatever your need, refinancing may be able to help.

The components of a car loan

There are six components of a car loan that it is recommended you understand if you don’t already. Before refinancing, you should have no identifiable grey areas in your car loan knowledge.

The loan period

Loan terms for car loans are generally between two to five years, depending on your plan. This term can be extended or decreased depending on the size of your monthly repayments.

The interest rate

Your car loan interest rate is arguably the most significant cost involved in your car loan. Typically expressed as a per annum figure, it may be smart to compare the rates between the possible lenders to save you from paying unnecessary funds.

The repayments

Generally, car loans are repaid monthly. However, depending on your lender, you may be able to arrange for your repayments to be made weekly or fortnightly. If you are able to make repayments more frequently, then you may be able to pay off your loan sooner.

The lender

The lender you choose should suit your needs. If you want flexibility in your repayments, you may need to shop around to find a suitable lender for your car loan. You may be able to be matched with a lender that can offer the cash you need to purchase a vehicle through Monzi’s lender-finder service.

Other charges

You shouldn’t assume the only costs of a car loan are your repayments and interest. There are also typically a myriad of other fees you may encounter. This may include establishment and break-out fees, ongoing fees, late payment fees and discharge fees.

Balloon payment

Balloon payments are less common, and you can choose whether to opt into this feature or not. A balloon payment is a lump sum paid to the lender at the end of a loan term. Keep in mind that balloon payments may result in higher total interest rates.

Why should you refinance your car loan?

There are multiple reasons for refinancing a car loan, it just depends on what your goal is. Perhaps you want to swap loans for one that has a longer-term or a lower interest rate. Or maybe you need to remove another person from the contract.

Whatever your need, refinancing your car loan may be a viable option. All you need to know is whether your goal is to increase, decrease or maintain your loan amount.

Things to consider before refinancing

Before you decide to refinance your car loan, you should check your credit score. If you have been consistently meeting your repayment deadlines and can show a good credit score, you may be able to negotiate with your lender for a lower interest rate on your loan. However, there still may be better deals out there than what you can arrange for. So, conduct your research and ensure whichever option you choose, is the best option for you.

In addition, evaluate how much of your loan term remains. Is your current loan almost complete? Would it be better for you to see it through rather than refinancing? As much as your current terms and conditions may be inconvenient, it may be worth seeing it through instead of incurring the entry and exit fees for switching lenders.

So you want to refinance?

Will you end up paying more interest over the life of the loan? Does the new loan have the features you want? Will your repayments be less than the previous loan?

Consider all elements in comparison to your existing loan. If you reduce your monthly repayments, will you be paying more in total by increasing the length of the loan? What are the upfront costs and accompanying interest charges? Will the new loan give you your desired flexibility and facilities for repayments? Try not to rush your refinancing decision as all these aspects may be important later on.

Finally, for further information, check out Moneysmart’s guide to debt consolidation and refinancing.

The pros and cons

As with any other financial decision, there are always advantages and disadvantages to refinancing your car loan.

Pros

  • If you pay lower repayments on the new loan, this could allow for more cash flow than you previously had.
  • Is your current lender a pain to deal with? Refinancing your loan may mean a new, more accommodating credit provider. Keep in mind that it may be better to keep this low on your priority list when refinancing.
  • Do you want more flexibility in your loan? Refinancing may allow you to enter a new loan with more features than your previous loan.
  • A lower interest rate could allow you to increase your savings. Keep in mind that interest rates may fluctuate, so it is essential to consider the timing when shopping around.

Cons

  • Switching car loans may require entry and exit fees. There will most likely be a fee to exit your current contract, and perhaps even a fee to apply for your new loan.
  • The total interest is also worth considering. If you negotiate a longer-term, will that extended-term at a lower rate mean that you end up paying more in interest than you would with a shorter-term loan?

How does refinancing a car loan work?

Once you decide you want to refinance your loan, you will need to find the appropriate lender. Once you’ve done this, you will require specific paperwork to be approved. This paperwork will include:

The vehicle’s details

What is the registration number? What was the purchase price, and engine number? What’s the make and model? Is the vehicle new or pre-owned?

100 points of identification

Depending on the lender’s criteria, this may include ID such as a passport, drivers license, birth certificate or Medicare card details.

Liabilities and assets

Liabilities and assets include details of the property you own, your ongoing expenses, any loans you’ve taken out, and any other information regarding debts you may have.

Proof of income

To meet this criterion, you may be required to provide proof of employment, two or three payslips and your employer’s information. Alternatively, if you are self-employed and need a loan then you may need to provide two years of tax returns.

Five steps to refinancing

  1. Consider your options – as mentioned, it may be extremely beneficial for you to consider all of your circumstances and options before refinancing, to ensure you are making the best decision.
  2. Calculate your repayment – you can easily find a car loan calculator online that will be able to give an estimation of the repayments for your new loan.
  3. Apply for car loan refinancing – once you have chosen your lender and desired term, interest rate, and repayment plan, you can go ahead and apply to refinance.
  4. Repay your existing loan – if you are approved for refinancing, your loan will be transferred and you can begin repaying the existing loan under the new conditions.
  5. Repay your new loan – once the existing loan is repaid, you can repay the new loan; hopefully, this will be a smooth process.

Make sure you fully understand any early-repayment fees, as well as application and exit fees before agreeing to refinance your loan.

Refinancing your car loan used car

How much will refinancing save you?

Refinance rates for car loans are dependent on your lender. You can compare rates online for free. Keep in mind that car loan refinance rates are dependent on timing, and they may increase and decrease semi-regularly.

Determining factors for car refinancing rates

  • Your car – typically interest rates for older vehicles are higher than interest rates for newer models. The milage, equity, and age of your vehicle may impact your interest rate. Higher mileage may mean higher interest rates. It is also vital for you to consider the book value of your vehicle, compared to what you owe. You may not be able to refinance if you have negative equity. In other words, you owe more than your vehicle’s book value.
  • Your credit score – if you have a high credit score, you have a much better chance of obtaining a better rate. If your credit score improves throughout your original loan, refinancing may allow you to apply for better rates when you refinance.
  • Your loan term – this is a relatively simplistic determining factor. The period you pick may affect the interest rate you can obtain. For example, the longer the term, the higher the interest rate may be.
  • The overall market – each lender has their refinancing terms and rates. However, interest rates are often controlled and determined at a federal government level. Meaning the federal reserve’s benchmark rate may affect consumers.

Why do new car loans have lower interest rates?

Cars are a depreciating asset, therefore, the resale value of new automobiles are easier to predict. Used vehicles have higher mileage, and are more likely to experience mechanical issues – this presents less reliability to lenders. Lenders may compensate for this by offering higher interest rates.

How soon should you refinance?

How soon you should refinance is dependent on your goal. If your goal is to save money, start looking now! However, refinancing, as with many other financial decisions, may be dependent upon your situation. Regardless, there may be a lender that can suit your needs, so as long as you know what you want, you’re good to go.

Can you refinance a secured car loan?

You may not be able to refinance a secured car loan. However, you can potentially refinance a secured personal loan. If you are using your car as security, Monzi may be able to match you with a lender that may offer the quick cash you need to cover a pressing expense.

When should you not refinance?

If the interest rate you’re planning to refinance to is only slightly lower, it may be better not to refinance. Ideally, you should be able to reduce your rates by around five per cent minimum or avoid the option. It may also be unwise to refinance with a loan that has a longer refinancing term than your current loan. Refinancing will most likely not be an option if your credit has deteriorated since the purchase of your car.

Can you pay your car loan off early?

You sure can! All you have to do is ensure you can do so without an additional fee. Some lenders allow you to do this, although a fee may be required. You may also have the option of a balloon payment. Meaning you can pay a larger-than-usual final payment at the end of your loan term.

Can you refinance with the same lender?

Of course. You can use the same lender to refinance your car loan. All you will need to do is contact them directly. From there, they may be able to inform you of your options. As a result, it may be possible to refinance through your original lender.

Car loan refinancing with a trade

Refinancing your car loan may be possible if you are willing to trade in your old car for a new car. Sometimes referred to as a rollover loan, if you owe money on the old car, the dealer may be able to roll the negative equity into the loan for the new vehicle. This does not mean you have paid off the old loan, however. Instead, it means you are now in possession of one car and two loans.

Can you refinance with bad credit?

Unfortunately, you may not be able to refinance your vehicle with bad credit. As mentioned, it is unlikely that you can apply for a better loan without having improved your credit throughout the duration of your original loan. Having said this, some lenders may be more willing than others to work with borrowers who have bad credit.

Bad credit car loans

Monzi may be able to match you to a lender that can possibly fund a loan for borrowers without good credit. Monzi’s network of lenders may be able to offer personal loans of up to $10,000.

If you are approved for one of these loans, you may be able to spend the cash to cover most personal expenses. As a guide, this may include a new or used car purchase, car repairs, maintenance and modifications.

Is a car loan a good idea?

If managed properly, a car loan can have a positive impact on your life. However, like any other personal loan found online, if you miss a repayment it could potentially damage your credit file. The primary benefit of a car loan is that it gives you faster access to owning a vehicle, a valuable asset if you require it for work. It also allows you to build your credit profile if you are responsible and timely with your repayments.

However, there is interest and fees attached, meaning you risk receiving defaults on your credit report. Cars are also a depreciating asset, meaning as soon as it’s yours, it begins losing its value. It is best to consider these pros and cons before applying for a car loan.

Is it better to finance through a bank or a dealership?

Both options have their advantages and disadvantages; it is up to you to decide which one you prefer. Dealership finance may be easier to arrange, as it can be set-up upon purchase of your vehicle, removing the possible hassle of dealing with a bank. However, it is up to your discretion.

How many times can you refinance your car loan?

Provided you qualify with a lender, there is no limit on the number of times you can refinance your loan as long as your vehicle meets the requirements for refinancing. However, there will be a point where your car no longer meets the refinancing lender’s standards. Hopefully, however, you have paid off your car loan by then.

In addition, note that multiple credit applications in a short period will impact your credit score. As a result, attempting to refinance your loan regularly may not be a wise decision.

Does refinancing a car loan hurt your credit?

Refinancing your car loan can potentially damage your credit score. The application to refinance will be displayed on your credit report as a hard inquiry. Refinancing will also lower the average age of your credit accounts, meaning it may also lower your credit score.

Don’t be downright pessimistic though, as refinancing makes your loan more affordable, provided you pay your repayments on time. It can also potentially help improve your credit score.

Monzi may be able to help you with a car loan

Monzi is a lender finder-service. The lenders we may be able to match you to are not car loan lenders. Instead, they are personal loan lenders that may allow you to use your loan to cover almost any personal expense. As a result, you could potentially buy or maintain a vehicle with one of these convenient cash injections.

We may be able to match you to an available lender in just 60 minutes, allowing you to access up to $10,000 potentially.

Best of all, Monzi is 100% online and paperwork-free. All you have to do is click the ‘apply now’ button at the bottom of the screen, or scroll up to our loan slider.

Will Monzi keep my information safe?

Of course! Our system ensures that your information will be well protected. Monzi is protected by Comodo and McAfee, meaning you can rest easy knowing two of internet security’s heavyweights are guarding your privacy.

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You won't use a penny to apply for our lender-finding service, but here's some costs you could expect from a lender

Loan amount

$300 - $2,000

Terms

12 months

Costs

20% upfront establishment fee

+ 4% monthly fee

Example

Loan Amount of $1,000 over 6 months repayable weekly (25 weekly repayments). $1,000 (Principal Amount) + $200 (20% Establishment Fee) + $240 (fees based on 4% per month over 25 weeks) = $1,440 total repayable in 25 weekly installments of $57.60.

Under the current legislation, most small personal loan providers don’t charge an annual interest rate (you’ll know this as an APR) %. The maximum you will be charged is a flat 20% Establishment Fee and a flat 4% Monthly Fee. The maximum comparison rate on loans between $300 and $2000 is 199.43%. This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate

Loan amount

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13 months

24 months

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48% annual percantage rate

67.41% comparison rate p.a.

Example

Loan Amount of $3,000 over 18 months repayable weekly (78 weekly repayments). $3,000 (Principle Amount) + $400 (Establishment Fee) + $1,379.06 (reducing interest) = $4,779.06 total repayable over 18 months with weekly installments of $61.27.

The Interest Rate for Secured Medium Loans is 48%. The Typical Comparison Rate is 67.41% p.a. WARNING: This comparison rate is true only for the examples given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate with the lender that finances your loan. Click here to see a worked example.

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Terms

13 months

24 months

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21.24% annual percantage rate

48% comparison rate p.a.

Example

Loan Amount of $10,000 over 24 months repayable weekly (104 weekly repayments). $10,000 (Principle Amount) + $5,577.12 (Interest) = $15,577.12 total repayable over 24 months with weekly installments of $149.78.

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