How does car loan refinancing work? 

When you enter into most secured car loans, you’re normally signing up for fixed interest rate agreement where the interest rate on your contract stays the same for the whole loan term.

While this is great for managing your repayments, often borrowers are looking to refinance out of their higher rate car loan midway through their term when fixed interest rates have dropped, as they feel they could get a better deal.

Lower rates vs additional car loan fees

Most financiers will not allow this, and often customers don’t save that much. When you factor in the loss of setup costs and early exit costs on the initial loan as well as the new setup costs on the refinance, it’s easy to see how few customers end up making big savings.

'If mid-term refinances were available in these cases a lot of introducers (Dealerships, Brokers, and Affiliates) 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 dealerships, 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 real benefit to the client. They might end up with a lower rate or repayment on paper, but have likely extended their term or lost out on fees.

Don't just focus on the interest rates

Because many borrowers focus on interest rates alone, they could unwittingly add additional interest on top of their first loan by refinancing the early exit costs and also the new setup. Some could even be talked into taking the loan out over an extended period from the initial loan, which would also increase 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).

Refinancing your car is not always the cheapest option

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.