Car Loan Refinancing: Costs, Eligibility and When It May Help

Car loan refinancing replaces an existing vehicle loan with a new credit contract. The new lender generally pays out the old loan, and you then make repayments under the new rate, term, fees and conditions.

A lower advertised rate can be useful, but it does not automatically mean the refinance will save money. The decision should be based on the payout amount, all switching costs, the remaining term, the new total amount payable and any change to security or loan features.

Why borrowers consider refinancing a car loan

Common reasons include:

• accessing a lower interest rate or lower fees;
• changing the repayment frequency or loan term;
• replacing a balloon payment or residual with a different structure;
• moving from an unsuitable loan feature or lender;
• removing or adding a borrower, where lender policy permits;
• combining vehicle finance with a broader business-finance review; or
• seeking repayments that better fit current cash flow.

Each reason involves trade-offs. For example, extending the term may reduce the scheduled repayment while increasing the time in debt and the total interest paid.

1. Start with the current payout figure

The account balance shown online may not be the amount required to close the loan. Ask the existing lender for a written payout figure that is valid to a stated date. It may include accrued interest, discharge fees, early-termination costs or other contract amounts.

Also check whether the existing loan is secured by the vehicle and how the security interest will be released. A new lender will normally require a clear process for paying out the old debt and registering its own security where applicable.

2. Compare total cost, not only the new repayment

A useful comparison keeps the remaining term consistent first. Review:

• the new interest rate and whether it is fixed or variable;
• application, establishment, broker, monthly and discharge fees;
• the amount financed, including any fees added to the loan;
• the repayment amount and frequency;
• the total interest and total amount payable;
• any balloon or residual payment;
• early-repayment conditions; and
• the cost difference over the same remaining period.

If the proposed refinance uses a longer term, request a second comparison using the existing remaining term. This helps separate a genuine pricing improvement from a repayment reduction created mainly by extending the debt.

Calculate the break-even point

Add the costs of leaving the existing loan and establishing the new one. Then compare those costs with the expected repayment or interest saving. If the vehicle is likely to be sold or the loan repaid before the break-even point, refinancing may provide little or no net benefit.

3. Vehicle value and negative equity matter

Lenders commonly assess the vehicle’s age, condition, kilometres, acceptable use and market value. They may also limit the amount they will lend relative to that value.

Negative equity exists when the payout amount is higher than the vehicle’s value. A lender may decline the application, require the shortfall to be paid from your own funds or apply different pricing and conditions. Rolling a shortfall or additional costs into a new loan can leave you owing more than the vehicle is worth for longer.

4. Approval and pricing are not guaranteed

A refinance is a new credit application. The lender may consider income, expenses, existing liabilities, repayment history, credit enquiries, credit-file information, employment or business stability and the proposed loan-to-value position.

There is no universal rule that every borrower should wait a set number of months before refinancing. The appropriate timing depends on the current contract, switching costs, remaining balance, vehicle value, repayment conduct and the lender’s eligibility criteria. Multiple applications made in a short period may also appear on a credit report, so comparing likely fit before applying can be important.

5. Check what happens to the term and balloon

Refinancing can change more than the interest rate. A new contract may restart the loan over a longer period, introduce a balloon payment or alter repayment flexibility.

A balloon payment can reduce regular repayments by deferring part of the principal, but the final amount remains payable and the total interest cost may be higher. If the existing loan already has a balloon, compare the cost of paying it, refinancing it or selling the vehicle. Read our guide to car loan balloon payments, costs and risks.

When refinancing may be worth investigating

It may be reasonable to compare options when:

• the current rate or fees are no longer competitive;
• your financial position or repayment history has materially improved;
• the remaining balance and term are large enough for savings to exceed switching costs;
• the current loan has unsuitable features or limited repayment flexibility;
• a balloon payment is approaching and you have reviewed the alternatives; or
• your business vehicle arrangements need to be reconsidered as part of a wider cash-flow plan.

When refinancing may not improve the outcome

Refinancing may provide limited value where:

• the loan is close to being repaid;
• exit and establishment costs outweigh the likely saving;
• the new term materially increases total interest;
• the vehicle is outside lender age or value limits;
• there is a substantial shortfall between the payout and vehicle value;
• the proposed repayment is lower only because a balloon has been added; or
• the borrower would be replacing temporary cash-flow pressure with a longer-term debt problem.

If you are already having difficulty making repayments, contact the existing lender’s hardship team promptly. Refinancing is not guaranteed and may not be the safest response to financial hardship.

Documents commonly requested

Requirements vary, but a lender may ask for:

• identification and address information;
• current loan statements and a payout letter;
• vehicle registration, purchase or valuation details;
• evidence of income or business trading;
• bank statements and details of other liabilities; and
• an explanation of the refinance purpose and any recent credit events.

A practical car loan refinancing checklist

1. Request the current payout figure and contract details.
2. Estimate the vehicle’s realistic market value.
3. Identify the objective: lower total cost, different term, removal of a balloon or another feature.
4. Compare alternatives over the same remaining term.
5. Include every exit, application and ongoing fee.
6. Check the total amount payable and break-even point.
7. Review security, early-repayment and balloon conditions.
8. Confirm likely eligibility before making multiple applications.
9. Read the new credit contract before the old loan is paid out.

How GQ Finance can help

GQ Finance can review the existing payout position, compare available car and personal loan options, and explain how rate, term, fees, vehicle value and any balloon affect the comparison. Business owners can also discuss relevant business finance options.

Any application is subject to eligibility, serviceability, lender policy and responsible-lending requirements. Rates, fees and product availability can change.

Frequently asked questions

Does refinancing always reduce the repayment?

No. The result depends on the amount financed, rate, fees, term and balloon. A lower repayment may be caused by extending the term rather than reducing the overall cost.

Can I refinance a car loan with negative equity?

Possibly, but lender policy varies. You may need to contribute funds to cover the shortfall, and approval is not assured.

Will refinancing affect my credit report?

A formal credit application will generally involve a credit enquiry. The lender will also assess other information on your credit report and your current financial position.

Can a business refinance a vehicle loan?

Business vehicle finance may be refinanced where the applicant, vehicle and proposed structure meet lender requirements. Accounting, GST and tax treatment should be discussed with a qualified tax adviser.

ASIC’s Moneysmart guidance recommends comparing car-loan interest rates, repayments, features and fees and considering the full cost of the loan. See Moneysmart’s car loan guidance.

This article provides general information only and does not take into account your objectives, financial situation or needs. Consider the full terms, costs and risks, and obtain independent tax, legal or financial advice where appropriate.