The Pros and Cons of Refinancing Your Car Loan

Wondering whether a car loan refinance is the right move for you? Learn about the pros and cons of refinancing your loan with Savvy!
Published on June 12th, 2020
  Written by 
Thomas Perrotta
Thomas Perrotta is the managing editor of Savvy. Throughout his time at the company, Thomas has specialised in personal finance, namely car, personal and small loans, although he has also written on topics ranging from mortgages to business loans to banking and more. Thomas graduated from the University of Adelaide with a Bachelor of Media, majoring in journalism, and has previously had his work published in The Advertiser.
Our authors
   Reviewed by 
Bill Tsouvalas


Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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refinance your car loan

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Refinancing a car loan is an option that can help you save money or improve your financial situation. However, like any financial decision, it's essential to carefully consider the pros and cons before proceeding. That’s where Savvy can help you out.

In this guide, we'll delve into the advantages and disadvantages of refinancing your car loan. Whether you're looking to lower your monthly payments, reduce your interest rate or change the terms of your loan, find out if refinancing is right for you today!

First and foremost, how do you refinance your car loan?

Car loan refinancing involves replacing your current car loan with a new loan from a different lender or under different terms. When you refinance a car loan, the new lender pays off the remaining balance of your existing loan and you make payments to the new lender according to the terms of the new loan.

To initiate the refinancing process, you'll need to apply for a new car loan with a different lender or with your current lender if they offer refinancing options. The lender will evaluate factors such as your credit score, income and the value of the car to determine the terms of the new loan.

If approved, the new loan will be used to pay off the remaining balance of your existing loan, and you'll start making payments on the new loan according to the agreed-upon terms.

Pro #1: Lower the cost of your loan

One of the primary advantages of refinancing your car loan is the potential to lower the overall cost of borrowing, specifically relating to interest rates and fees. If you originally took out your car loan when interest rates were higher or your credit score was lower, refinancing can potentially allow you to secure lower rates and charges.

Lowering the cost of your loan through refinancing can also lead to reduced monthly payments, making it easier to manage your budget and free up funds for other expenses.

Pro #2: Adjust your loan term to suit your needs

Another benefit of refinancing your car loan is the flexibility to adjust the loan term to better suit your financial situation and goals. If you're struggling to keep up with high monthly payments, refinancing to a longer loan term can lower your monthly payments by spreading them out over a longer period.

Conversely, if you're in a better financial position and want to pay off your loan more quickly, refinancing to a shorter loan term can help you save on interest and become debt-free sooner.

Pro #3: Switch to a new lender

Refinancing your car loan also allows you to switch to a new lender, which can offer various benefits. If you're dissatisfied with your current lender's customer service, online features or interest rates, refinancing allows you to shop around and find a lender that better meets your needs.

Additionally, switching to a new lender may provide access to promotional offers or incentives, such as cashback bonuses or lower fees. According to Bill Tsouvalas, Managing Director of Savvy:

“It’s always crucial to continue surveying the market and comparing your options, even after you’ve taken out your car loan.

“Without one eye on your other options, you might miss out on valuable deals that could save you important money on your loan.”

Bill Tsouvalas, Managing Director - Savvy

Pro #4: Remove or include a cosigner

If you originally obtained your car loan with a cosigner, refinancing presents the opportunity to remove them on your new loan. Removing a cosigner can provide financial independence and relieve them of responsibility for the loan. This can be particularly beneficial if your credit has improved since the initial loan application or if you're now in a more stable financial position.

On the other hand, if you didn't have a cosigner initially but now want to include one to qualify for a lower interest rate or better loan terms, refinancing allows you to do so. Whether you're looking to remove or include a cosigner, refinancing offers flexibility to adjust your loan arrangement to better suit your needs and circumstances.

Con #1: Fees may apply

One potential downside of refinancing your car loan is that it may involve various fees and charges. Depending on your lender and the terms of your loan, you may be required to pay early repayment costs, as well as an application fee with your new lender. These fees will add to the overall cost of refinancing and potentially negate the savings you stand to gain.

Before proceeding with refinancing, it's essential to carefully review the terms and conditions of your current and future loan and calculate the total cost of switching compared to staying with your existing deal.

Con #2: Potential for higher interest

While refinancing your car loan can potentially lower your interest rate and save you money, there's also a risk that you may end up paying more interest than before. This could happen if your credit score has declined since you obtained the original loan, market interest rates have risen or as a result of a lengthened term.

Before refinancing, it's crucial to shop around and compare offers from multiple lenders to ensure that you're getting the best possible interest rate.

Con #3: Potential for negative equity

Refinancing your car loan also carries the risk of negative equity. This occurs if the car has depreciated faster than you've paid down the loan balance. If you refinance a car with negative equity, your new lender may not be willing to offer the full balance of your outstanding debt (based on your car’s current value), leaving you to cover the shortfall out of pocket.

Before refinancing, it's essential to assess the current market value of your car. If you're at risk of negative equity, consider alternative options such as making extra payments to reduce the loan balance or delaying refinancing until you've built up more equity in the car.

If you're considering refinancing your car, it's important to compare as many options as possible before you apply, which you can do through Savvy today.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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