When you enter into most secured car loans, the main players in the lending field would be entering into a fixed interest rate agreement where the interest rate on your contract stays the same for the whole loan term.
Quite often borrowers are looking to refinance out of their higher rate loan midway through their term when fixed interest rates have dropped, as they feel they could get a better deal.
Most Motor financiers will not allow this and a good reason for this are the loss of setup costs and early exit costs on the initial loan and also the new setup costs on the refinance could outweigh any benefit in an interest rate cut.
If mid-term refinances were available in these cases a lot of introducers could be “churning” loans for commissions, where there was no benefit to the borrower and in a lot of occasions actually putting them in a worse position, even though their interest rate is lower.
“Churning” is a term used where introducers, such as finance brokers, would engage in a refinance with a client where the main benefit for them is another commission cheque and not necessarily an option that has any benefit to the client. This would also be frowned up under the NCCP Act credit legislation which is relevant to the finance industry.
Due to a lot of borrowers focussing on interest rate being most important, they could be unaware that by refinancing, they have added additional interest on top of their initial loan, by also refinancing the early exit costs and also the new setup costs on the refinance and could also be taking the loan out over an extended period from the initial loan, also increasing the interest payable.
(e.g. 10%p.a. of $20000 over 48 months would be less total interest payable over the full term, than 6%p.a. of $22000 over 60 months, as to refinance there could be a substantial cost to change your loan, hence no benefit in refinancing even to save 4%p.a. Even on the same example, if the client requested to take this offer over 48 months at 6%p.a. of $22000 as to not extend the loan term, they would still be worse off with the 4% p.a. saving)
A refinance is not always about a cheaper interest rate though and if the reason behind this can be explained, lenders will still look at doing a refinance mid-term on a case by case basis. This should be discussed in detail in regards to your reasons for a refinance and a good professional broker should be able to advise if it is a possible outcome and the steps and processes around this.
If you are looking to refinance Residuals or Balloons payments, there are quite a few lenders in the market that will allow this, even if it were to change lenders. Often the final payment with your current lender may not be the cheapest or most flexible option, so it is still wise to enquire in regards to this prior to finalising your decision just to refinance with your current lender.
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