After having a car loan for a while, you may find a more competitive offer in the market. This could be a lower interest rate, or a loan with more flexibility around repayments. Whatever the reason, it could be worth checking around to see if you can find a loan that better suits your goals.
Refinancing your car loan simply means taking out a new loan and using those funds to pay off your existing car loan. You still owe money on the car, but now it’s via a different loan product, and potentially with a different lender.
If it’s not going to work in your favour, then there’s no point in refinancing. Some of the reasons you might want to refinance include:
Lower repayments. Your budget might mean you want more money in your pocket every month. Refinancing could get you a lower interest rate, or extend the term of your loan, either way, you could end up paying less money out per month, as well as over the total life of the loan.
Pay off your loan sooner. If you find a lower interest rate loan, but keep the payments at existing levels, you’ll reduce the life of the loan and be debt-free sooner.
Extra repayments. You may want the option to pay extra when you can afford it, if your current loan doesn’t allow that, refinancing could be the way to go.
Redraw. If you do make extra payments, it’s handy to be able to access that surplus money if, and when, it’s needed.
Longer loan term. You may want to spread your payments out over a longer term, refinancing could help you do that. You’ll pay lower regular payments, but you could pay more interest over full loan term.
Add or remove a co-signer. Adding a co-signer to the loan can sometimes help you get a better rate, especially if they have a better credit history than you.
Get a better relationship with your lender. If your lender doesn’t offer the standard of service that you’d expect, then it might be time to change.
That’s the general idea. Though there are other reasons, as above, that you may want to refinance.
By hunting around for a competitive interest rate with a lender that doesn’t charge too many fees, you could end up with a loan that can mean you repay less every month. Either that, or paying the same as you are now, but being potentially debt free sooner.
Refinancing typically follows a similar process as when you took out your original loan. Essentially, all you’re doing is applying for another loan, with which you’ll use to pay off your existing one. In some cases, the lender will transfer the funds directly into your existing loan.
Lenders may need to see two forms of identification, like a driver’s licence, passport, or birth certificate. You’ll also have to show proof of income; generally recent wage slips are required. You may also be asked for proof of your current financial situation, like bank statements and credit card balances etc.
Typically, you should be at least six months into your current car loan before you consider refinancing. If you’ve consistently met your repayment obligations during that time, that could set you in better stead when your refinancing application is being assessed.
This varies between lenders, so it’s one of the things you should consider before refinancing. Read the fine print of your loan documents or contact your lender for the low down.
Fees are a potential downside of refinancing your car loan, so look out for fees such as:
Establishment fees: Not only might your existing lender charge an exit fee, but your new lender may charge establishment fees. It’s important to know what these fees are and how much they could cost before you sign up to a new loan.
Penalty fees: Hopefully you’ll maintain a consistent repayment history, but if not, some lenders can charge punitive fees, which could increase the overall cost of the loan.
Redraw service fees: If you’re after a car loan with a redraw facility, make sure that any fees charged when you do redraw are reasonable or, preferably, non-existent.
Eligibility criteria can vary between lenders, but, if you have maintained a good payment schedule with your current loan, and have a regular income, a good credit history and a permanent address, you could be eligible to refinance your car loan.
With iSelect you can compare car loan products and lenders from the range of providers, and select the loan that suits your refinancing goals.