Five things to know about car refinancing

Refinancing a car loan can be a smart financial move, but it's important to understand the details before deciding. Many people don’t realise that it’s even possible to refinance your car loan. So, it’s important to understand why you’d want to do it and some of the advantages and disadvantages. Here are five key things to know.

What is car loan refinancing?

Car loan refinancing involves replacing your existing car loan with a new one. The new loan pays off your existing debt, allowing you to start making payments on the refinanced car loan. It's generally best to wait at least 12 months after taking out the original loan before refinancing, as this allows you time to recoup credit score points lost when applying for the initial loan.

Benefits of car loan refinancing

Refinancing your car loan can offer several advantages, including potentially lower interest rates and lower monthly payments. It may also provide more flexible loan features, such as adding balloon payments or changing repayment frequency. Refinancing offers the opportunity to modify loan terms, like reducing or extending the loan period, and allows you to add or remove a co-signer from the loan.

Potential drawbacks of car loan refinancing

There are also potential disadvantages to consider before refinancing. For example, you may end up paying more interest over the life of the loan if you extend the term. Refinancing involves additional fees, such as exit fees, early termination fees and application fees. If your car's value is less than the outstanding loan balance, refinancing may be challenging, and refinancing near the end of your loan term may not be cost-effective.

When to consider car loan refinancing

Refinancing might be beneficial in situations where you've found car loans with better rates and terms, or when your credit score has improved, making you eligible for better rates. You may also want to change your repayment amount or frequency, or wish to modify your loan term, potentially paying off your debt earlier.

When to avoid car loan refinancing

Refinancing may not be ideal if you're nearing the end of your loan term, your car's value is less than your outstanding loan balance, the costs of refinancing outweigh potential savings, or you've already paid off most of the loan balance.

The best person to talk to about refinancing your car loan is your finance broker, who can compare your options for you.

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Neeed any other advice, please get in touch brigid@spinfinancebrokers.com.au