You financed the car. You have been making the repayments. Now you have looked at the interest rate properly and realised you might be paying more than you need to.
You are not stuck with it.
Refinancing a car loan means replacing your current loan with a new one. The new lender pays out what you still owe and you start making repayments under a new rate, term and fee structure.
The process itself is not particularly complicated. The part that matters is making sure the new loan genuinely leaves you better off.
Here is how to refinance a car loan from start to finish.
Step 1: Find out exactly what you still owe
Start with your current lender.
You need the amount required to close the loan completely today. This is normally called a payout figure or settlement figure.
Do not assume this is exactly the same as the balance showing in your banking app.
The payout figure can include:
- Your remaining loan balance
- Interest owing up to the settlement date
- Administration costs
- Any applicable early repayment fee
Your existing credit contract should explain whether early repayment costs can apply.
This number matters because it tells you exactly how large the replacement loan needs to be.
If your payout figure is $18,750, refinancing $18,000 is not going to clear the old finance.
Step 2: Check your current interest rate and loan term
Next, work out what staying where you are will cost.
Find:
- Your current interest rate
- Regular repayment
- Remaining number of repayments
- Remaining loan term
- Account or administration fees
- Total amount left to repay
This gives you something useful to compare a new offer against.
Without these figures, a lender telling you it can drop your repayment by $30 a week sounds good.
You do not know whether it actually is.
Step 3: Check what your car is worth
This is particularly important if your current car loan is secured against the vehicle.
Cars depreciate.
Your loan balance also falls as you make repayments.
Those two numbers do not always move at the same speed.
If your car is worth $25,000 and you owe $17,000, you have positive equity of around $8,000.
If the car is worth $17,000 but your payout figure is $22,000, you are roughly $5,000 in negative equity.
That can make refinancing harder because the new lender may be asked to lend more money than the asset securing the loan is currently worth.
Negative equity is particularly common when a car was purchased with little or no deposit, the original loan term was long or the vehicle depreciated quickly.
It does not automatically mean refinancing is impossible. It does mean the lender will look more closely at the deal.
Step 4: Check whether your financial position has improved
One of the best times to look at refinancing is when you are a stronger borrower than you were when you originally took out the loan.
Maybe you financed your first car with a limited credit history.
Maybe you had only recently started your job.
Maybe you had other debts that have since been cleared.
Or maybe you simply accepted expensive dealer finance because you wanted the car and did not compare properly at the time.
A year or two of consistent repayments can leave your credit profile looking very different.
Lenders generally look at factors such as:
If those factors have improved since your first application, the rates available to you may have improved too.
- Credit history
- Repayment record
- Income
- Employment stability
- Existing debts
- Regular expenses
- Loan amount
- Vehicle value
- Whether the loan is secured
Step 5: Decide what you actually want refinancing to achieve
Do not start comparing loans until you know what you are trying to fix.
There are three common goals.
Get a lower interest rate
This is the obvious one.
If you can move the remaining balance from a high rate to a meaningfully lower one, you may reduce both your repayment and the total interest paid.
Lower your regular repayment
Sometimes the issue is cash flow rather than total interest. Refinancing over a longer term can reduce what comes out of your account every week or fortnight.
The catch is that stretching the debt out can increase your total interest bill.
Pay the car off faster
You can also refinance onto a shorter term.
Your repayment may stay similar or even increase, but clearing the balance sooner reduces the amount of time interest has to build up.
Those are three different objectives.
Know which one you care about before comparing offers.
Step 6: Compare the new loan against the old one
This is the point where people focus too heavily on the interest rate.
Suppose you have $25,000 remaining on a car loan at 16% p.a. with four years left.
For illustration, repayments would be around $709 a month and you would pay roughly $9,000 in interest over those four years.
Refinance the same $25,000 over four years at 10% p.a. and the repayment falls to around $634 a month, with roughly $5,400 in interest.
That is around $3,600 less interest before refinancing fees are considered.
Now add the costs.
If your old lender charges an early settlement cost and your new loan has establishment and broker fees, those need to come out of the saving.
A $3,600 gross saving might still be worthwhile.
A $500 gross saving could disappear completely once fees are included.
The lowest rate is not automatically the best deal.
The lowest total cost that still fits your budget is the number that matters.
Compare:
- Old loan payout amount
- Old loan early repayment costs
- New interest rate
- New loan term
- New regular repayment
- Establishment fees
- Broker fees
- Ongoing fees
- Total amount repayable
Step 7: Be careful with a longer loan term
This deserves its own section because it is the easiest way to make refinancing look better than it really is.
Imagine your existing car loan has three years left.
A new lender offers you a five-year refinance.
Your weekly repayment falls sharply.
That looks like a win.
But part of the reduction has nothing to do with getting a better deal. You have simply given yourself another two years to repay the money.
A lower repayment and a cheaper loan are not the same thing. If your goal is to reduce total borrowing costs, compare the new loan using roughly the same remaining term as your existing one. If you intentionally choose a longer term because you need breathing room in the household budget, understand the trade-off before signing.
Step 8: Gather what the lender needs
Refinancing is a new loan application.
The lender still has to assess you.
Requirements vary between lenders, but you may need information such as:
- Photo identification
- Proof of income
- Employment details
- Recent bank statements
- Current loan details
- Your payout figure
- Vehicle make and model
- Registration details
- Existing financial commitments
Having this information ready makes the process considerably easier.
The lender may also carry out a credit assessment and check that the new repayments are affordable based on your current circumstances.
The fact that you were approved for the original car loan does not automatically mean another lender will approve the refinance.
They are assessing you based on where your finances are today.
Step 9: Avoid applying blindly to lender after lender
There is a difference between comparing lenders and submitting full credit applications everywhere.
The first is sensible.
The second can become a problem.
Formal credit applications can result in enquiries appearing on your credit file. Applying repeatedly in a short period can make it look like you are urgently seeking credit.
That is where using a broker can simplify the process.
Lending Room runs a soft credit check during our initial assessment, which does not affect your credit score. We then assess your application against our panel of 20+ vetted lenders rather than making you guess which lender is most likely to suit your situation.
One application gives us what we need to start comparing the options.
Step 10: The new lender pays out the old loan
Once the refinance is approved and you decide to proceed, the existing loan needs to be cleared.
In many refinancing arrangements, the new lender pays the settlement amount directly to your existing lender.
You do not receive $20,000 in your account and then decide what to do with it.
The money has a job.
It clears the existing car finance.
If the old loan was secured against the car, the existing lender’s security interest needs to be removed and the new secured lender may register its own interest over the vehicle.
Your original loan closes and repayments begin under the new contract.
Check that the old account has been fully settled before cancelling any automatic payments.
When is the best time to refinance a car loan?
There is no fixed point in the loan where refinancing suddenly becomes worthwhile.
But there are situations where it is worth checking.
Your credit profile has improved
If you originally borrowed with limited or damaged credit and have since built a cleaner repayment history, you may now qualify for more competitive pricing.
Your original rate was high
Dealer finance and loans taken when your options were limited can sometimes leave you sitting on a rate well above what your current profile could qualify for.
You still have a decent balance left
The more money and time remaining on a high-rate loan, the more opportunity there is for a lower rate to generate a real saving.
Your financial situation has changed
A stronger income, more stable employment or less existing debt can change how lenders assess you.
You need to restructure repayments
A refinance can sometimes make repayments more manageable, although extending the term needs to be weighed against the extra interest it can create.
When might refinancing not be worth it?
Sometimes the best refinance is no refinance.
Keeping your existing loan can make more sense if:
- The remaining balance is small
- The loan is nearly finished
- Your current rate is already competitive
- Early repayment costs are high
- New loan fees wipe out the interest saving
- You would need to substantially extend the term
- Your credit or financial position has worsened
- You owe considerably more than the car is worth
Can you refinance dealer finance?
Yes.
In fact, dealer finance is one of the most obvious reasons to check what else is available after buying the car. At the dealership, most of your attention is on the vehicle. You have found the model you want. You have driven it. You have negotiated the price.
Then the finance gets presented as the last bit of paperwork standing between you and the keys. That is not exactly the environment where most people spend two hours comparing rates, loan terms and fees across multiple lenders.
If you later discover that your dealer finance is expensive, you can potentially refinance it just like another car loan. The dealership does not own you for the life of the finance agreement.
Can you refinance a car loan with bad credit?
Potentially.
The more useful question is whether another lender can offer terms that are actually better than the ones you already have. If your credit is still weaker than when the original loan was approved, refinancing may not improve the deal.
If your score has improved because you have made consistent repayments and cleaned up previous issues, the situation can be different. A broker can assess what is realistically available before you start making multiple formal applications.
Can you refinance a car loan in negative equity?
It can be harder.
If your car is worth $18,000 but the payout figure is $22,000, the new lender has a $4,000 gap to consider. Some lenders may decline the refinance because the security does not cover the full debt. Others may consider the wider application depending on your financial profile, how large the shortfall is and how the new loan is structured.
If the gap is substantial, waiting while you pay the balance down may produce a cleaner refinance later.
How Lending Room handles car loan refinancing
Lending Room is a registered finance broker (FSP486566), not a direct lender.
When you apply to refinance your car loan through us, we look at your existing finance, current payout amount, credit profile, income and vehicle before matching the application against our panel of 20+ vetted lenders.
Our initial assessment uses a soft credit check, so our check does not affect your credit score.
If another lender can offer a better overall deal, we show you the actual rate, term and fees so you can compare it properly against what you already have.
If refinancing does not stack up after the costs are included, changing lenders purely for the sake of it makes no sense.
Car-loan rates through our panel currently range from 8.99% to 29.95% p.a. (AIR), with secured rates starting from 8.99% p.a. and unsecured rates from 10.99% p.a. Your actual rate depends on your credit profile, loan amount, term, security and lender criteria.
If you want to find out whether your current car loan can be improved, get in touch with the Lending Room team and we can assess what options are realistically available.
This article is for general information only and does not constitute financial advice. Lending Room is a registered financial services provider (FSP486566). We are a broker and do not lend directly. Rates from 8.99% to 29.95% p.a. (AIR). Establishment fees up to $450 and broker fees up to $1,500 may apply. Your rate and approval are subject to lender credit criteria.