When Should I Refinance My Car Loan?
If your financial circumstances have changed since you first took out your car loan, you might be able to refinance the loan to save money with a better loan.
So when should you choose to refinance your loan?
When To Refinance Your Car Loan
There are two situations where refinancing your car loan will give you a better financial outcome.
1. When your credit rating has improved
If you have had stable employment, residence and you've met every repayment on any loans and credit cards on time, then your credit rating will have improved.
With a stronger credit rating, you have more car refinancing options than you had when you first took out the car loan. This is because you have demonstrated that you can and will repay your car loan on time, so your car refinancing is less of a risk for the lender than when you first took out the loan.
The trick is to make sure that the savings that you'll make with the new car loan will be greater than any break costs and the application fee for the car refinancing.
2. When car loan interest rates have dropped
If car loan interest rates were 6% when you took out the car loan, but you can get 4% interest car loans now, it makes sense to refinance.
When You Shouldn't Refinance
There are situations when refinancing your car loan will end up costing a lot more than keeping the car loan that you have right now. If you are in a tight spot financially, speak to your lender about reducing your payments until you can get back on top of things.
One of these is when you just want to get lower monthly payments. Refinancing will end up costing you even more in the longer term.
The other is when the car refinancing loan has account keeping fees and application fees that mean that you aren't better off with the car refinancing, even though it has a lower interest rate.
You'll also find it's hard to refinance a car loan if the vehicle is now worth less than the remaining loan balance.
Steps to Car Refinancing:
If car refinancing is clearly your quickest route to lowering the cost of your car, here's what to do next:
1. Get your loan balance
You might be able to access your car loan statements online, or you can call your lender to get your latest car loan balance. You'll need to know this amount when you apply for car refinancing.
2. Know your credit rating
Get a free credit check so that you know exactly where you stand.
3. Find out the current value of your car
How much is your car worth right now? Is the value of the car still greater than your current loan balance? If it is you are in a stronger position to refinance the remainder of your car loan.
You'll also need to have some information about your car when you apply for a car refinance, like the VIN, the age of the car, make, model, and registration. You will also need evidence of your current comprehensive car insurance.
4. Choose a lender
Not all lenders will provide car refinancing, but a lot do. You might choose to refinance through a car loan broker so that you can compare a range of refinancing options before selecting one with the lowest costs.
Look for credit unions, online lenders and peer-to-peer lenders who can often offer car refinance loans that are very competitive.
5. Calculate Costs
Calculate the costs of application, plus any costs to pay out your current car loan early. If the total costs are less than the total savings, you can proceed to apply.
When you're ready to make the application, you'll need proof of your current income and some ID. Once you apply, you should get a fast answer as car refinance loans are much more straightforward than new car loans.
If you'd like to find out more, you can chat to a refinance manager to get some options and find out if a car loan refinance is going to work in your favour.