The guide to refinancing your car loan

Refinancing your car loan could unlock potential lower repayments. But what is car refinancing, and how do you get started?

It feels pretty good paying off a good chunk of your car loan. But even if you’ve put a big dent (pardon the expression) in your car loan, refinancing could still help you save on your regular repayments.

What does refinancing a car loan mean?

Refinancing involves changing your lender or your loan agreement with your current lender. It could mean that you’re able to enjoy a lower interest rate.

If the interest rate on your current car loan is fixed, the interest rate and repayments will stay the same throughout the term of the loan. So if your circumstances change or interest rates drop, refinancing might let you enjoy lower interest rates.

How does car loan refinancing work?

If you refinance your current loan with a new lender, the money you borrow from your new lender will pay off your current loan. You then make regular repayments to your new lender according to the terms of your loan contract.

Why should I refinance my car loan?

Whether you’re looking for a better deal, want more control over your car loan or your circumstances have changed, refinancing may help you reach your goals.

What are the pros and cons of refinancing your car loan?

The possible benefits of refinancing a car loan include:

Locking in a lower interest rate than your current loan – potentially reducing your repayments

Extending your loan term to lower your repayments and give you more time to pay off your loan

Adding or removing a joint borrower because your circumstances have changed

Dealing with a new lender – if your current one hasn’t met your expectations

The potential downsides of refinancing include:

Paying more interest over the long term if you extend the loan term to reduce monthly repayments

Costly surprises such as potential entry and exit fees when you refinance

Not having access to the right features with your new lender, such as the ability to repay the loan early

Reduced borrowing power. You may not be able to borrow as much as you did originally due to changes in lending criteria/credit policies.

When should I consider refinancing my car loan?

You may want to consider refinancing your car loan:

When your circumstances change

If your credit score has improved, you have changed careers, want to add or remove a co-borrower to the loan or your situation has changed in any other ways, refinancing could be an option. Your changed circumstances may help you secure a lower interest rate with another lender, reducing your repayments.

When you want to reduce your repayments

When you’re looking for a better deal

Make sure you speak to your current lender first. Depending on your circumstances, your current lender may be able to assist with your requirements.

How do I refinance my car loan?

There are 4 steps to the process:

1. Find out your pay-out figure: It’s a good idea to contact your existing lender and find out how much you have left to pay off on your loan. This will help with your application. Also inquire about any early exit fees.
2. Assess your options: Compare lenders, their loan offerings, establishment and ongoing fees and make sure you understand the terms and conditions of the loan. Once you find the loan option that suits your needs, you can complete an application with the lender.

Explore your Pepper Money car loan options and calculate your estimated repayments here.
3. Submit relevant documents and information to support your application: To assist with the assessment of your loan application, you will need details about your current loan, your car and your personal circumstances. At Pepper, once we have all your paperwork, you could have a decision in as little as four hours or by the next business day.
4. Pay off your current loan: Your new lender may do this on your behalf once your new loan is approved – or you might need to organise it. Once your existing loan has been paid off, make sure the account is closed, and start making repayments on your new loan.

Is refinancing a car loan bad for my credit?

Refinancing your car loan may reduce your credit score in the short term as your new lender will make a credit enquiry on your credit report. But your credit score should improve when you make your first loan repayments on time.

That being said, applying for a number of car loans within a short period of time may affect your credit score.

While you need to consider your options carefully, refinancing may be an option for you to reduce your monthly repayments and help your short-term cash flow.

Thinking about refinancing your car loan? Explore our options now.

Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.

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