The short answer is yes! You can refinance your car loan to take advantage of lower rates and/or better loan features. However, you need to consider certain pros and cons before refinancing.

When you refinance a car loan, you’re leaving your loan prematurely and entering a new one. This involves a lot of paperwork and discussions with both lenders, as well as additional fees. 

In this article, we provide essential information about the cost of auto loan refinance and what else you need to keep in mind. 

Potential Savings vs Refinance Costs 

Refinancing to a lower rate or better loan features can minimise the total cost of a car loan. You could also save thousands by changing the loan repayment frequency, shortening the loan term, or using loan features like redraw facilities. 

But of course, refinancing a car loan comes at a cost. To exit your current loan, you may have to pay exit fees, early payment fees, break fees, and other costs associated with leaving the loan prematurely. You’ll also have application costs, settlement fees, and the like when you apply for a car loan refinance. 

In some cases, you could lose money by refinancing even with a lower interest rate if you choose to extend the loan term. Doing so may lower your monthly repayments but increase the overall interest paid over the life of the loan. 

For example, your original loan only has three years left with an outstanding balance of $20,000 with an interest rate of 6.39%. You’ll pay $611.98 per month or $22,031.28 for the rest of your loan term. However, if you decide to refinance the remaining $20,000 at 5.39% interest but over an extended six-year term you would be paying more. Although monthly you’d only be paying $325.73 per month, the overall cost of the loan would be $23,45.56. 

Is refinancing a car loan worth it? 

Ultimately, it depends on your priorities and why you’re refinancing your loan in the first place. If you’re looking to save money by lowering rates and shortening the loan term, then a car refinance may be a good option. 

For those who want to reduce their monthly repayments to free up cash flow, going for an extended term with a slight decrease in interest rates can be a good idea even though you’re paying more interest. 

When is the best time to refinance a car loan? 

Timing also plays an important role in the success of a car loan refinance. Do it too late or too soon and you may not get a good deal out of it. Here are the best times to refinance your car loan: 

  • Interest rates have dropped significantly.
    You may have taken out a loan when interest rates were at their highest. If car finance rates have dropped by a huge margin, it could be ideal to switch loans. However, if the car loan rates drop by less than 1%, refinancing could cost you more with the exit fees and settlement fees. 

  • Your finances have marked improvement.
    You may have taken out a car loan out of necessity even if your credit score is not at its best. But if after a few years, you find yourself in a better financial situation and have a good credit score, you could qualify for a car loan with better terms and conditions. 

  • There are a lot of years left on your loan term.
    A good time to refinance a car loan is at the beginning of the loan term. It’s not advisable to refinance your car loan if you only have a year or two left because you’ve paid off most of the balance at that point. Even if interest rates drop significantly, the cost of switching loans could end up costing you more. 

Every borrower’s situation is different. What works for some may not work for others. It’s best to discuss your car loan refinance needs with your lender or a broker to determine what type of finance solution best suits you.

How do I apply for a car loan refinance? 

Lenders offering a car loan refinance can be hard to find. When shopping around for a car loan refinance, you have to look at the interest rate and fees. Before applying for refinance, you should also talk to your current lender to know the full process of exiting your loan. 

If you’re looking for the best deals on car loan refinance, get in touch with the expert brokers at CarLoans.com.au. We can help you find a great deal on your refinance so you can save more and make the most out of your car loan.