Refinancing a fixed car loan to a variable car loan

You’ve taken out a fixed rate car loan but your financial situation has changed or it’s not meeting your expectations. Is there a way to remedy this? The simple answer is yes– you can look to refinance your fixed rate car loan.

If you’re unfamiliar with refinancing for a car loan, check out this quick guide: 

How to refinance a fixed rate car loan to a variable rate 

Refinancing involves exiting your current fixed rate car loan and applying for a variable rate car loan. You’re often switching between lenders, as well. The process is a bit more complex than your typical new car loan application because you’re switching between lenders. 

First, you need to speak with your current lender about ending your loan before the agreed-upon term. You may incur penalties such as early exit fees or break fees which could make refinancing more expensive. You need to consider these additional costs before applying for a car loan refinance. 

Second, you need to find a variable rate car loan refinance that suits your current needs. Refinancing a car loan can be a complicated and expensive process, but it’s worth it to get a good deal.  

Using the funds from your car loan refinance, your new lender will close out your old loan with your previous lender. Once all that is settled, you’ll start paying off your car loan refinance with your new lender.  

When switching from a fixed rate to a variable rate car loan, you’ll have to pay close attention to the repayment amounts as they could change. Unlike a fixed rate car loan which has repayment certainty through the life of the loan, a variable rate car loan could experience interest rate fluctuations depending on market factors and funding costs; and if your variable interest rate changes, you can expect your repayment amount to change accordingly.

Pros & cons of refinancing to a variable rate car loan 

Before you start applying for a car loan refinance, it’s best to first weigh the pros and cons: 

Advantages of car loan refinance 

• Benefit from more flexible loan features. By switching from a fixed rate to a variable rate car finance, you can enjoy features like redraw facilities and make early repayments without additional fees. 
• Save on interest costs when there are rate cuts. If there are rate changes, your car loan will reflect the lowering rates. This means you’ll have lower repayments and can save more on interest. 
• Pay off your loan quickly. Because you have access to redraw facilities, you can pay off your faster at no additional cost. Doing so can also give you more savings over the life of the loan. 

Disadvantages of car loan refinance 

• Refinancing a car loan can be costly. The break fees, application fees, and other additional expenses related to refinancing could be more than you bargained for. When considering a car loan refinance, make sure that you’re saving more than you’re spending. 
• You could pay more in interest. If rates in the market or funding costs increase, you could see your repayments increase as well. A variable rate loan can be risky especially if interest rates continue to rise. 

Should you refinance a fixed rate car loan to variable rate? 

Car loans are not a one-size-fits-all finance solution. Ultimately, what works best for you will depend on your current financial situation. Fixed rate and variable rate car loans have their own benefits and drawbacks. Understanding how refinancing your current loan will affect you can help you make the right decision. 

Factors to consider when refinancing a car loan 

Remaining balance – A loan refinance is most beneficial when you still have a larger remaining balance and are early into your current loan term as this gives you the biggest savings potential. If you’ve almost paid off your debt and you’re close to reaching the end of the term, the costs may outweigh the benefits. 

• Credit score – Your credit rating will impact the kind of car loan refinance you get. If your credit score has decreased a few points over the years, it may be harder to find a refinance loan with low interest rates. But if you find yourself in a better financial situation, refinancing your car loan to get better rates may be a good idea. 
• Interest rates – Pay close attention to the current interest rates for car loans. If interest rates are significantly lower compared to when you first took out your car loan, it could be worthwhile to refinance it. 
• Car value – Because a car is a depreciating asset, you may have negative equity (i.e. your vehicle is worth less than what you’re paying) on your loan. This will make it harder for you to refinance your car loan as lenders could see you as a high-risk borrower. 

Want to refinance your car loan? 

Learn more about how you can refinance your car loan! Speak with our friendly lending specialists and they’ll be happy to answer your queries and talk about what your car loan refinance options are. You can reach us at 13 10 90 or schedule a call! 

If you’re ready to refinance your car loan, you can apply online here! 

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