Refinancing a car loan means taking out a new loan to pay out your existing one, ideally on better terms. It's straightforward in principle and there are good reasons to do it, but it works differently from refinancing a mortgage and the maths is tighter. Here's how car loan refinancing works in Australia, when it's worth it, and the constraints that catch people out.
Can you refinance a car loan?
Yes. There's nothing unusual about it: a new lender pays out your current loan, takes security over the car, and you repay them instead. Your original lender is settled in full and releases its interest over the vehicle.
The question isn't whether you can, it's whether you should, because two things eat into the benefit in a way they don't on a home loan.
The two costs that decide it
The exit cost on your current loan. Most car loans in Australia are fixed rate, and fixed contracts commonly include an early termination fee for paying out before the end of the term. That fee is the first thing to subtract from any saving. Ask your lender for a written payout figure, which sets out the exact amount to clear the loan including any early payout adjustment; we've explained your rights around this in paying off a car loan early.
The shape of a car loan. Interest accrues on the outstanding balance, so most of the interest on a car loan is charged in the early years when the balance is high. Refinance in the last stretch of a loan and there's not much interest left to save, which is why refinancing usually makes most sense earlier in the term rather than later. Our guide to how car loan interest rates work explains the mechanics.
Put simply: the saving has to beat the exit fee plus any establishment cost on the new loan. Sometimes it comfortably does. Sometimes it doesn't, and the honest answer is to leave it alone.
The age limit nobody mentions
This is the constraint that stops most car refinances, and it has nothing to do with you.
Lenders set a maximum age for a vehicle at the end of the loan term, not at the start. So a car that was easy to finance when it was near new can fall outside a lender's policy a few years later, particularly if you want a term long enough to make the repayments worthwhile. The older the car, the fewer lenders will consider it, and the shorter the term they'll offer, which pushes repayments up and undoes the point of refinancing.
If your car is getting on, this is the first thing to check, before you look at anything else.
When refinancing genuinely makes sense
Your circumstances have improved. A better credit file, longer employment history, or a cleaner set of financials than when you first borrowed can put you in front of lenders that wouldn't have looked at you originally. This is the most common good reason.
You took the loan in a hurry. Finance arranged at a dealership under time pressure, or a loan taken when you had limited options, is often worth revisiting once you're not standing in a showroom.
You have a balloon payment coming. This is the single most common reason people refinance a car loan in Australia, and it gets its own section below.
Your repayments aren't comfortable. Extending the term lowers the repayment, though it increases the total interest paid. That's a legitimate trade if cash flow is the problem, as long as you go in knowing it costs more overall.
Your loan is unsecured and the car could secure it. Moving from an unsecured personal loan to a secured car loan can change the terms available, because the lender's risk falls. See secured versus unsecured car loans.
When it usually doesn't
- You're near the end of the term. Little interest left to save, and the exit fee still applies.
- The car is too old for lenders to take as security over a useful term.
- You owe more than the car is worth. Negative equity means the new lender is being asked to lend more than the security is worth, which most won't do without a contribution from you.
- Your situation has worsened since you took the loan. Refinancing is not a fix for repayment stress; if you're struggling, contact your current lender about hardship arrangements first, because that's a different and more appropriate process.
Refinancing a balloon payment
If your loan has a balloon, a lump sum due at the end of the term, you have three choices when it falls due: pay it, trade or sell the car and clear it, or refinance the balloon into a new loan.
Refinancing the balloon is common and perfectly normal. Two things to know. First, the car is several years older by then, so the age limit above bites hardest at exactly this moment, and it's worth checking your options well before the balloon is due rather than in the final month. Second, refinancing a balloon extends the time you're paying for the car, so it costs more overall than clearing it would. Our guide to balloon payments covers the structure.
Start this conversation two or three months out. Leaving it to the last fortnight limits your choices badly.
What it does to your credit file
A refinance is a new credit application, so it's recorded as an enquiry on your file, and the old account closes as paid in full. Neither is a problem in itself. What does damage a file is applying to several lenders at once to see who says yes, because every application is recorded. Get matched to a lender that fits your situation, then apply once. Our guide to your credit file explains what lenders see.
The process
- Get a written payout figure from your current lender, and note any early termination fee and how long the figure is valid.
- Establish the car's value and your equity. Positive equity makes this straightforward; negative equity is the blocker.
- Check the car's age against what lenders will take over the term you need.
- Compare the total cost, not the repayment. A lower repayment over a longer term can cost more in total, and the comparison rate is the tool for comparing like with like.
- Apply once, to a lender that suits your circumstances.
- Settlement. The new lender pays out the old loan directly, the original lender releases its security interest over the car, and the new lender registers its own.
What you'll need
- The payout figure or recent statement from your current lender
- Details of the car: make, model, year, kilometres, VIN
- Proof of income, or bank statements and BAS if you're self-employed
- Identification
Self-employed borrowers without current financials aren't excluded; low doc options are assessed differently.
Where a broker fits
Most of the work in a refinance is working out whether it's worth doing at all, and that means comparing the saving against the exit fee, checking the car's age against lender policy, and knowing which lenders want that profile. If the numbers don't stack up, the right answer is to say so. Our refinancing page sets out what we arrange, and car loans covers new purchases.
This article is general information only and is not financial or legal advice. Your position depends on your contract, your circumstances and the vehicle.
Damo Treadgold is the director of Treadgold Finance, an FBAA-accredited finance broker on the Sunshine Coast, arranging car, boat, equipment and business finance Australia-wide.
Frequently Asked Questions
Can you refinance a car loan in Australia?
Yes. A new lender pays out your existing loan and takes security over the car. The question is usually whether the saving beats the cost of exiting your current loan.
Is it worth refinancing a car loan?
It depends on where you are in the term and what your current contract charges to exit. Most of the interest on a car loan is charged early, so refinancing tends to be worth more earlier in the term. Compare the saving against any early termination fee.
Can I refinance an older car?
Sometimes. Lenders set a maximum vehicle age at the end of the loan term, not the start, so older cars attract fewer lenders and shorter terms. Check this before anything else.
Can I refinance a balloon payment?
Yes, and it's common. Start two to three months before the balloon is due, because the car is older by then and your options narrow if you leave it late.
Does refinancing hurt my credit score?
A refinance is recorded as a credit enquiry and the old account closes as paid in full, which is normal. Applying to several lenders at once is what causes damage, because each application is recorded.
Can I refinance if I owe more than the car is worth?
It's difficult. Most lenders won't lend more than the security is worth without a contribution from you. Waiting until the balance falls below the car's value is often the practical answer.
