If you’re trying to save money during this COVID-led recession, refinancing your car loan to a more competitive interest rate to reduce your repayments could be a good move.
But unlike refinancing a home loan, there’s a lot more to consider than getting a better interest rate when refinancing a car loan.
Why consider refinancing?
Most people who are considering refinancing their car loan are doing so because they want to reduce their repayments by getting a lower interest rate. Others want to do so because they want more flexibility or to consolidate their debts.
But there are many things to consider when refinancing your car loan and plenty of reasons why refinancing may not be a smart move.
When should you refinance your car loan?
Interest rates have dropped since you took out your original loan. Perhaps one of the biggest reasons people refinance their car loan is to get a better interest rate. Car loan interest rates are notoriously high, but recent cash rate cuts by the Reserve Bank means they’re getting lower. Interest rates for secured car loans currently vary between 2.99% and 10% while unsecured can be as high as 15%.
You want to reduce your repayments. By refinancing to a more competitive interest rate, your monthly repayments will also decrease, which is ideal if you’re trying to save money during this time.
Your credit score has improved. If your credit score has improved since you first took out your car loan, you may be eligible for a more competitive interest rate. Having a bad credit score drastically impacts how high or low your interest rate is, so if you’ve been good and diligently making your repayments, you may just be able to take out a lower interest rate. If you’re not sure what your credit score is, you can get a free credit report once every 12 months through any of the major credit reporting agencies in Australia, like Experian, Equifax or Illion.
You want to reduce your loan term. Perhaps you’re in a really good financial situation right now and want to get ahead of your repayments but your current car loan doesn’t allow you to make extra repayments or charges significant fees for doing so. In this case, refinancing to a loan with a shorter loan term or allows extra repayments may be a good move.
You want to extend your loan term. On the other hand, if you want to lengthen your loan term, it could make sense to refinance to a loan that allows you to take out a longer repayment period.
When shouldn’t you refinance your car loan?
The value of your car is less than what you owe on your loan. Unlike a home, cars depreciate in value. If the value of your car is worth less than what you still owe on your car loan, it may be more difficult to refinance because the lender will deem it as too risky as they may not be able to recoup the costs by selling the vehicle if you default on your loan.
The fees and time involved in refinancing outweigh any potential savings. There are many costs involved in refinancing, including break fees, exit fees and application fees. If you don’t have long left on your loan term, it may actually cost you more money to refinance than it would to simply stay with your lender.
You’re going to apply for more credit in the near future. Many people aren’t aware of this, but every time you apply for credit (a loan) it negatively impacts your credit score. This could make it harder for you to take out a loan in the near future, so if you’re thinking about applying for a loan soon, it may be best to hold off on refinancing.
You’re near the end of your loan term. If you’re reaching the end of paying off your car loan, the costs of refinancing may outweigh any benefits like saving money on interest.
So is it worth refinancing a car loan? It depends on what your reasons for doing so are but if you’re doing so for the right reasons, it can be worth it if the rates are low.
loans.com.au has low fixed rates starting at 3.97% p.a. (4.51% p.a. comparison rate). If you’ve been thinking about refinancing, chat with one of our friendly lenders today.