The Ultimate Guide to Refinancing Your Car Loan
Learn when refinancing may make sense, how to compare your current loan, what costs to consider and how replacing an existing car loan could affect your repayments.
Why This Guide Matters
A car loan can remain in place for several years, but your financial position and the lending market may change considerably during that time. Your income may improve, your credit profile may become stronger or different lenders may offer loan structures that better suit your current circumstances.
Refinancing involves replacing your existing car loan with a new loan. It may help reduce repayments, lower the overall interest cost or provide a loan structure that better matches your current budget. However, refinancing is not automatically the right decision for every borrower.
This guide explains how car loan refinancing works, when it may be worth considering and the costs and potential risks to review before making a decision.
Contents
Chapter 1 — Should You Refinance Your Car Loan?
Refinancing means taking out a new loan to repay and close your existing car loan. Once the original loan has been paid out, you begin making repayments to the new lender under the terms of the replacement loan.
The main reason people refinance is to improve the overall structure or cost of their car finance. This may involve obtaining a lower interest rate, reducing regular repayments, shortening the remaining loan term or removing an unsuitable balloon payment.
Before refinancing, it is important to compare the full cost of your current loan against the proposed replacement loan. A lower advertised rate does not always produce a better financial outcome if the new loan includes additional fees or extends the debt over a much longer period.
Common Reasons People Refinance
A lower rate or different loan term may reduce the amount you are required to pay each week, fortnight or month.
A more competitive rate may reduce the amount of interest payable over the remaining life of the loan.
Some borrowers refinance to repay their car loan sooner and reduce the total amount of interest charged.
Refinancing may allow an upcoming balloon payment to be incorporated into a new repayment structure.
A new loan may provide different repayment options, account access or early repayment conditions.
A more manageable repayment structure may help create additional room within the household or business budget.
When Refinancing May Make Sense
- Your current interest rate is no longer competitive.
- Your credit profile has improved since the original loan was approved.
- Your income or employment position has become stronger.
- You accepted dealer finance without comparing other lenders.
- Your current loan includes an upcoming balloon payment.
- You want to reduce repayments or repay the loan sooner.
- Your current lender or loan structure no longer suits your needs.
Yes Approved Tip
Do not assess refinancing on the interest rate alone. Compare the repayment, remaining term, fees, payout figure and total amount payable before deciding whether a new loan provides a genuine benefit.
When Refinancing May Not Be Worthwhile
Refinancing may provide limited benefit when the existing loan is close to being repaid, the payout figure includes substantial early termination costs or the new loan extends the debt well beyond the original end date.
It may also be difficult to refinance when the vehicle is worth significantly less than the existing loan balance. This is sometimes referred to as negative equity. Some lenders may require the shortfall to be paid before settlement or may decline to refinance the full amount.
Important Consideration
A lower repayment does not always mean a cheaper loan. Extending the remaining balance over a longer period can reduce the regular repayment while increasing the total interest paid.
Chapter 2 — Signs Your Current Loan May No Longer Suit You
Many borrowers arrange car finance at the time they purchase the vehicle and then continue making the scheduled repayments without reviewing the loan again. Over time, the original finance arrangement may become less competitive or may no longer suit the borrower's financial position.
Reviewing your loan does not mean you are required to refinance. It simply allows you to understand what you currently owe, how much the finance is costing and whether another option may provide a better outcome.
Your Interest Rate Appears High
Interest rates can vary considerably between lenders and applicants. Your rate may have been influenced by your credit history, employment, deposit, vehicle, loan amount and the lender available when you purchased the car.
If your financial circumstances have improved since then, you may qualify for a different rate through another lender. However, any potential saving must be considered alongside the cost of paying out the existing loan and establishing the new finance.
Your Credit Profile Has Improved
Borrowers with limited credit history, previous defaults or recent credit issues may initially receive finance at a higher rate. A period of reliable repayments, stable employment and improved management of other debts may strengthen the credit profile over time.
An improved credit profile does not guarantee that refinancing will be approved, but it may increase the range of lenders and products available.
Your Income or Employment Has Changed
A stronger income position, longer employment history or move from casual to permanent employment may improve the way some lenders assess an application.
Self-employed borrowers may also have more finance options once they have established a longer ABN history, GST registration or more complete financial records.
You Used Dealer Finance Without Comparing
Dealer finance can be convenient because it is arranged as part of the vehicle purchase. However, convenience does not necessarily mean the loan is the most competitive or suitable option available.
Some buyers focus on the vehicle negotiation and accept the finance presented at the dealership without comparing the rate, fees, term or balloon structure against other lenders.
Details Worth Reviewing
The amount required to completely repay and close the existing loan on a particular date.
Check the actual rate applying to the loan rather than relying only on the original repayment quote.
Confirm how many months remain before the loan is scheduled to finish.
Record the regular repayment and whether it is made weekly, fortnightly or monthly.
Review whether the current lender charges an administration, termination or early repayment fee.
Confirm whether a residual or balloon amount will remain payable at the end of the current loan.
Your Repayments Are Difficult to Manage
A repayment that was affordable when the loan began may become difficult following changes to household expenses, interest costs or income. Refinancing may help reduce the regular repayment in some circumstances.
However, borrowers experiencing financial hardship should also contact their current lender. Most lenders have hardship assistance processes that may be more appropriate than applying for additional credit.
You Have an Upcoming Balloon Payment
A balloon payment is a larger amount left owing at the end of some car loans. It reduces the scheduled repayments during the loan but must eventually be paid, refinanced or otherwise resolved.
Reviewing the balloon well before its due date gives you more time to understand the available options. Waiting until the final repayment is due can create unnecessary pressure and reduce the time available to compare lenders.
Your Existing Loan Has an Unnecessarily Long Term
Longer loan terms generally reduce the regular repayment but may increase the total interest cost. If your financial position has improved, refinancing to a shorter remaining term may allow you to repay the vehicle sooner.
Common Mistake
Refinancing only to obtain the lowest possible repayment. A smaller repayment achieved by restarting the loan over another five, six or seven years may increase the total cost and keep the debt in place long after the vehicle has aged.
Thinking About Refinancing Your Car Loan?
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Chapter 3 — Understanding Rates, Fees and Loan Terms
The interest rate is important, but it is only one part of the refinancing decision. The better comparison is between the complete cost of your current loan and the complete cost of the proposed replacement loan.
This means reviewing the interest rate, comparison rate, establishment fees, payout costs, remaining loan term and total amount payable. A loan with a lower advertised rate may still cost more if it includes higher fees or extends the debt over a longer period.
Interest Rate
The interest rate determines how interest is calculated on the loan balance. A lower rate may reduce the repayment and overall interest cost, although the actual benefit will depend on the loan amount and remaining term.
Comparison Rate
A comparison rate combines the interest rate with certain fees and charges into a single percentage. It can be useful when comparing products, but it may not reflect every cost that applies to your individual loan.
You should still review the full loan proposal, including establishment fees, monthly fees, discharge costs and any optional products.
Remaining Loan Term
The term of the replacement loan has a major influence on both the repayment and the total cost. A longer term generally produces a lower repayment, while a shorter term may increase the repayment but reduce the overall interest paid.
| Refinance Option | Possible Benefit | Important Consideration |
|---|---|---|
| Lower rate with the same remaining term | May reduce repayments and total interest. | Check that fees do not outweigh the saving. |
| Lower rate with a shorter term | May repay the loan sooner and reduce interest. | The regular repayment may increase. |
| Lower repayment with a longer term | May improve short-term cash flow. | Total interest may increase significantly. |
| Refinancing an upcoming balloon | May spread the final amount across scheduled repayments. | The vehicle and remaining debt must meet lender policy. |
| Adding extra debt to the refinance | May simplify several repayments. | Can increase the balance secured against the vehicle. |
Establishment and Ongoing Fees
The new lender may charge an application fee, establishment fee, monthly account fee or other costs. Your current lender may also charge a discharge or early termination fee when the original loan is paid out.
These fees should be included when estimating whether refinancing will provide a genuine saving.
Total Amount Payable
The total amount payable is often more useful than looking at the repayment alone. It shows how much you may pay across the full remaining term, including interest and applicable fees.
Yes Approved Tip
Compare the new loan over a term that is similar to the remaining term on your current loan. This creates a fairer comparison and helps avoid making a more expensive loan appear cheaper simply because the repayment has been spread over additional years.
Fixed and Variable Rates
Car loans may be offered with fixed or variable interest rates depending on the lender and product.
A fixed rate generally remains unchanged for the agreed loan term, which provides repayment certainty. A variable rate may change over time, meaning repayments or the interest cost could increase or decrease.
The most suitable option depends on your circumstances, budget and preference for certainty or flexibility.
Important Information
The lowest available rate is not necessarily available to every applicant. Rates may vary according to credit history, income, employment, vehicle age, loan amount, security position and other lender criteria.
Chapter 4 — Dealer Finance and Balloon Payments
Many car loans are arranged through dealerships because the finance can be completed at the same time as the vehicle purchase. Dealer finance can be convenient, but the original arrangement may not remain suitable for the full life of the loan.
Borrowers may later review dealer finance because the rate appears high, the loan includes an upcoming balloon payment or the original product was accepted without comparing other lenders.
Reviewing Dealer Finance
Start by locating your loan contract or requesting the current loan details from the lender. You should confirm the rate, repayment, remaining term, payout figure and whether any balloon or residual amount applies.
Dealer finance may also include additional products such as warranties, insurance or protection products. Some of these amounts may have been financed as part of the original loan balance.
Dealer Finance Details to Check
Confirm whether the loan included only the vehicle or also financed fees, insurance and other products.
Review the actual contract rate and compare it with the repayment and remaining term.
Ongoing account fees can increase the effective cost of the loan over several years.
Check whether a larger final repayment remains due at the end of the agreement.
Identify any discharge, early termination or administration fees that apply when closing the loan.
Review whether warranties, insurance or other products were financed into the original balance.
What Is a Balloon Payment?
A balloon payment is a larger amount left owing at the end of the loan term. Because part of the balance is deferred, the scheduled repayments during the loan are usually lower than they would be without a balloon.
When the balloon becomes due, the borrower generally needs to pay it from available funds, sell or trade the vehicle, or refinance the remaining amount subject to lender approval.
Benefits of a Balloon Payment
- Lower scheduled repayments during the original loan term.
- Potentially improved short-term cash flow.
- May suit eligible business borrowers planning regular vehicle replacement.
Risks of a Balloon Payment
- A substantial amount remains payable at the end of the term.
- The vehicle may be worth less than the balloon amount.
- Refinancing is not guaranteed and requires a new credit assessment.
- Extending the balloon into a new loan may increase the total interest cost.
Common Mistake
Assuming the vehicle can always be sold or traded for enough to clear the balloon. Vehicle values can change, and the final payout may be higher than the vehicle's market value.
Guaranteed Future Value Arrangements
Some manufacturer finance products include a Guaranteed Future Value, commonly referred to as GFV. These arrangements may provide several end-of-term options, subject to the vehicle meeting agreed kilometre, condition and servicing requirements.
The available options may include retaining the vehicle by paying or refinancing the final amount, trading the vehicle or returning it under the program conditions.
A GFV arrangement should be reviewed carefully because excess kilometres, damage, servicing requirements and other conditions may affect the end-of-term outcome.
Plan Before the Final Payment
Begin reviewing a balloon or GFV arrangement several months before the end date. This allows time to obtain the payout figure, assess the vehicle's value and compare available refinance or replacement options.
Chapter 5 — How the Refinancing Process Works
Refinancing is generally straightforward, but it requires accurate information about the current loan, the vehicle and your financial position.
The new lender will complete a credit assessment before approving the replacement loan. Approval is not automatic, even when the existing loan has been maintained satisfactorily.
1. Review the Existing Loan
- ✓ Obtain the current payout figure.
- ✓ Confirm the interest rate.
- ✓ Check the repayment frequency.
- ✓ Review the remaining term.
- ✓ Identify any balloon payment.
2. Compare Refinance Options
- ✓ Compare suitable lenders.
- ✓ Review rates and fees.
- ✓ Compare loan terms.
- ✓ Estimate the total saving.
- ✓ Consider repayment flexibility.
3. Complete the Application
- ✓ Provide identification.
- ✓ Confirm income and employment.
- ✓ Supply vehicle information.
- ✓ Provide current loan details.
- ✓ Complete lender requirements.
Step 1 — Request a Payout Figure
The payout figure is the amount required to fully repay the existing loan on a nominated date. It may include the remaining principal, accrued interest and any applicable discharge or early repayment fees.
Because interest continues to accrue, payout figures are generally valid only until a specified date.
Step 2 — Assess the Vehicle
The replacement lender will usually consider the vehicle's make, model, age, condition and market value. The vehicle may need to meet the lender's acceptable security criteria.
If the payout figure is substantially higher than the vehicle's value, refinancing may be more difficult because the lender may not agree to finance the full shortfall.
Step 3 — Complete a New Credit Assessment
The lender will assess your income, expenses, employment, liabilities, credit history and ability to meet the proposed repayments.
Supporting information may include identification, payslips, bank statements, employment details and current loan documentation. Requirements vary between lenders and applicants.
Step 4 — Review the New Loan Offer
Before accepting the refinance, review the proposed rate, repayment, fees, loan term, total amount payable and any early repayment conditions.
The new loan should be compared against the current loan using the same remaining period wherever practical.
Step 5 — Existing Loan Is Paid Out
Once the new loan settles, the replacement lender generally pays the approved amount directly to the existing lender. The original loan is then closed, subject to the payout being processed correctly.
Step 6 — New Repayments Begin
After settlement, repayments begin under the new loan agreement. Confirm the repayment amount, frequency, direct debit details and first payment date.
After Settlement
Confirm that the original loan has been closed and that no further direct debits are scheduled. Keep the payout confirmation and new loan documents with your financial records.
Compare Before Replacing Your Existing Loan
A Yes Approved broker can review your current payout figure and compare suitable car loan refinancing options from more than 40 Australian lenders.
Chapter 6 — Estimate Your Potential Savings
One of the most common reasons people refinance is to reduce the overall cost of their existing car loan. The actual benefit depends on a range of factors including your remaining balance, interest rate, loan term and any fees associated with replacing the loan.
Rather than looking only at the interest rate, compare your current repayment with the proposed repayment and review the total amount payable over the remaining life of the loan.
Savings Calculator
Use the calculator below to estimate how changes to your interest rate and remaining loan term could affect your repayments. The figures are estimates only and do not include every lender fee or individual lending requirement.
These calculations are estimates only and should not be relied upon as a formal finance quote. Interest rates, fees, lender policy and your personal circumstances will influence the actual finance available.
Important Information
A lower repayment does not always mean a lower-cost loan. Always compare the repayment, remaining term, fees and total amount payable before replacing an existing loan.
Chapter 7 — Common Refinancing Mistakes
Refinancing can be beneficial when it improves your overall financial position. However, many borrowers focus on a single feature of the new loan rather than reviewing the entire finance arrangement.
The advertised rate is important, but it should be considered alongside fees, repayments and the remaining loan term.
A longer loan term may reduce repayments while increasing the total interest paid over the life of the loan.
Your current lender may charge fees when the loan is repaid early.
Increasing the loan balance may solve a short-term problem but could significantly increase the total amount borrowed.
Leaving a balloon payment until the final weeks before it falls due reduces the time available to compare lenders.
Always understand the repayment, fees, term and early repayment conditions before accepting a replacement loan.
Yes Approved Tip
The best refinance is not always the loan with the lowest rate. The right solution is the one that delivers the strongest overall financial outcome after considering repayments, fees, flexibility and total cost.
Frequently Asked Questions
Can I refinance my car loan at any time?
In many cases yes, however your current lender may charge discharge or early termination fees and the replacement lender must approve the new application.
Will refinancing affect my credit score?
Applying for finance usually involves a credit enquiry. Lenders also assess your repayment history and overall financial position when considering an application.
Can I refinance a balloon payment?
Potentially. Many borrowers refinance an upcoming balloon payment, although approval depends on lender policy, the vehicle and your financial circumstances.
Can I refinance dealer finance?
Yes. Dealer-arranged finance can often be reviewed in the same way as other car loans. Compare the remaining balance, interest rate, repayment and fees before making a decision.
Will refinancing reduce my repayments?
It may. This depends on the new interest rate, remaining term, loan amount and any fees included in the replacement loan.
Should I compare more than one lender?
Different lenders have different pricing, lending policies and loan features. Comparing multiple lenders helps you understand the options available for your circumstances.
Refinancing Checklist
Before Applying
- ✓ Obtain your payout figure.
- ✓ Confirm your current interest rate.
- ✓ Review your remaining loan term.
- ✓ Check for discharge fees.
- ✓ Identify any balloon payment.
Before Settlement
- ✓ Compare repayments.
- ✓ Review all lender fees.
- ✓ Read the loan contract.
- ✓ Confirm direct debit details.
- ✓ Understand the total amount payable.
After Settlement
- ✓ Confirm the original loan has closed.
- ✓ Keep the payout confirmation.
- ✓ Monitor your first repayment.
- ✓ Store your loan documents safely.
- ✓ Review your budget.
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