Considering refinancing your car loan? Here’s what you need to know

If you have an existing vehicle loan, you’ve probably heard the term ‘refinance’ or ‘cash out refinance’ thrown around, and you might be wondering, what exactly does it mean to refinance a loan?

Refinancing your car loan means that you are replacing your existing loan with a new loan, normally from a different lender and with more favourable loan conditions. The money that you borrow from your new lender is used to pay off the loan with your previous lender. 

The cost of car loans can be extremely varied, which means that getting the best loan possible is just as important as getting the best deal on the actual car (if not more!). 

If you’re not happy with your current loan, refinancing your car could be a great way to get a better deal and save money overall.

Reasons to consider refinancing your car loan

There are a number of reasons why you might be looking to refinance your existing car loan to find one that has a lower interest rate or better loan terms.

You’ve improved your credit score

If you’ve been consistently making your monthly repayments with your existing loan, and your credit score has improved as a result of that, you might be able to use that improved credit score to secure a loan with a lower interest rate with a new lender. A lower interest rate decreases your monthly repayments as well as saving you money in the long term as it also reduces the total cost of the loan.

You didn’t get a great deal with your first car loan

Another reason why you might be looking to refinance your car loan is because your existing loan has a high interest rate or unfavourable loan conditions. Perhaps when you originally secured the loan you didn’t have time to properly assess all your options, or your lender wasn’t transparent about additional costs and fees you’d incur down the line. Regardless of exactly what the reason is, if you’re not happy with the current terms of your loan, car loan refinancing could be a great option for you.

You want to lower your monthly repayments

If you’re finding that your monthly repayments are too high, you might want to refinance your car loan so you can get a new loan with more affordable repayments. This would involve getting a longer loan term, to spread out the cost of the loan over a greater time span. It would probably mean that you’d end up paying more in interest over the course of your loan. However if your main concern is your monthly repayments, this might be the best option for you.

You want to save some money in the long term

If you’re less concerned about the monthly cost of your loan, but want to make sure you are saving money overall, you might want to consider refinancing. You could switch to a new lender with a lower interest rate, but keep your monthly repayments the same, so you can pay off the loan faster and pay less interest overall. Depending on the terms and conditions of the loan, you might even be able to make extra repayments without any additional fees.

You want to change your loan conditions

You may decide you want to refinance your car loan so that you can change some of the conditions of the loan. For example, you may want to add a balloon payment to your loan so you can reduce your regular repayments, or you might want to change the type of your loan from secured to unsecured (or vice versa).

You’re making the most of low interest rates

Remember that car loans are generally fixed rate products, so even you won’t realise the benefit of today’s low interest rate environment on your loan repayments automatically.

So another great reason to refinance your car loan is to take advantage of Australia’s current low interest rates. You might find that there are more competitive interest rates available now than when you secured your existing loan, making it a great time to refinance.

Factors to consider when deciding whether to refinance your loan

Value of the car

One of the important things to consider before refinancing your loan is what the value of your car is. Because cars depreciate over time, the current value of your car will probably not be what you paid for it. To make sure you have the best possible chance of refinancing, make sure that your car is currently worth more than what you currently owe. 

If you owe more money to your current lender than what your car is worth, you would probably be seen as a ‘high risk’ customer, making it more difficult to secure refinance. You can get a free car valuation through carsales or Drive.

Remaining term left on your loan

Before refinancing, make sure you consider how long is left on your current loan, and determine whether it is worth the time and effort (and potential cost) of securing a new loan. If, for example, you only had one year left on your loan, it might end up costing you more in fees to refinance your car than simply completing your regular repayments. However, if you’ve still got at least a few years left on your loan, and you’re unhappy with the unfavourable conditions, refinancing might be a great idea for you.

Entry fees, exit fees and other costs

Make sure you also consider any ‘change’ fees that might apply when refinancing your loan. This might include exit fees, break fees or sign up fees, but they vary between lenders. Contact your existing lender to find out what fees will apply. With your new loan, Driva will tell you upfront about any fees that will apply, so there are no hidden surprises down the line.

Your current financial situation

It’s important to make sure you’re in a relatively strong financial position before you apply for a new loan. If you’re not in a strong financial position, this might have an impact on your ability to obtain approval on a loan.

Four steps to refinancing your car loan

Once you’ve weighed up your options and decided that refinancing your car loan is the way to go, that’s where Driva comes in.

1. Contact your existing lender

First, you’ll want to contact your current lender to find out what the pay-off amount is. You’ll need this figure to tell lenders how much your loan costs, so they can set your rate and approve your new loan. 

You’ll also want to find out if there are any exit fees, break fees or other charges that will occur. If you don’t have very long left on your loan, it’s important to weigh up whether paying these costs is worth it. However, if you still have a few years left, it might be worth it to pay a few extra fees to secure a lower interest rate, and end up paying less overall. 

2. Compare your car finance options with Driva

Now that you’re ready to compare loan options, Driva’s smart refinancing platform is here to help. You’ll just need to tell us a few details about you, your car and your existing loan, and we’ll instantly provide you with personalised quotes from our panel of over 30 lenders. You’ll need to provide us with the original loan balance and term and age of the vehicle so that we can give you personalised rates. 

Driva will then provide rates that you are pre-qualified for based on your personal profile - this means that they’re not generic rates that will change later in the process. We’ll also assess your profile against the eligibility criteria of each lender, so you’ll only see loans that you’re actually eligible for. From your Driva dashboard, you’ll be able to view all of your personalised options with 100% transparency. All of the rates you’ll see are inclusive of all fees, with nothing hidden and no surprises down the road! This makes it easy to see how much you’ll be saving if you refinance

3. Apply for car loan refinance

Once you’ve decided which lender you want to go with, we’ll just need a few documents from you before we can progress your application. The only documents you’ll need to have on you are your driver's license and your two most recent payslips. We’ll also need to see some bank statements, but you can retrieve these digitally with our friends at bankstatements.com.au. 

Before we share your profile with your chosen lender, we’ll make sure that you’re likely to be approved. This prevents disappointment as well as protecting your credit score. 

4. Get approved and pay off your new loan

After we’ve submitted your application to the lender, the approval process generally takes between 2 hours and 2 days, depending on the lender. 

Once you’ve been approved, your new lender will transfer the funds to your old lender directly - so there’s no extra action required! You can then start making your regular loan repayments to your new lender and enjoy the savings!

Once you’ve decided that refinancing is the right move for you, simply use Driva’s smart refinancing platform to find your best eligible rates from across our panel of over 30 lenders. Simply click ‘I want to refinance my vehicle’ and we’ll let you know how much you can save!

If you have any queries please get in touch with our team of car finance experts. Give us a call on 1300 755 494 or email us at hello@driva.com.au. Or if you’re ready to get started, get your personalised rates in just minutes.