Is refinancing a car loan worth it?

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In this current low rate environment, refinancing has become standard practice for many mortgage holders to reduce their mortgage by thousands of dollars.

But is refinancing your auto loan a good idea?

Let’s look at the numbers:

Since 2016, there have been eight reductions in the Reserve Bank of Australia’s (RBA) official exchange rate. It is now at an all-time low of 0.10% against 2.00%.

The current average variable rate for auto loans for new and used vehicles is 6.68%. When you compare that to the average rate at the same time five years ago, 7.82% – it’s a 1.14% difference.

In the case of mortgage interest rates, the current average variable rate is 3.30% of 4.72% five years ago. While it is a 1.42% differenceThe low margin can make a big difference as home loans are generally around 25 to 30 years old.

So the question is, should you refinance your current car loan?

We weighed it.

Why refinancing a car might be a bad idea

  • You might not save as much:

As mentioned above, auto credit rates have remained low for the past five years with minimal movement. So you might not end up reducing as much in refinancing as you would with a mortgage because the terms are shorter, between one and 10 years. This means that the period of time for saving is much shorter. So, all in all, it might be just a few hundred dollars – which could be the cost of applying for a new loan anyway.

Take this for example: let’s say you have three years left on your six-year car loan with $ 30,000 remaining. Your original car loan rate was 7.82%, if you kept that rate you would pay $ 938 per month and $ 3,754 in total interest. If you refinanced with a 6.68% loan, you would pay $ 922 and $ 3,189 in interest. That’s a savings of $ 16 per month and $ 565 in interest.

Currently on the Mozo database, the application or set-up fee for auto loans ranges from $ 0 to $ 995. The savings can therefore be even less if you have to pay a fee.

  • New second-hand refinancing:

If you are considering refinancing a new car loan, chances are you will need to refinance a used car loan because your car is no longer new. Typically, used car loans have higher interest rates than new car loans, so you may not be able to find a lower rate.

For example, the average variable rate for new car loans is 6.33% based on the Mozo database. In contrast, the average for used vehicles is 6.83%.

When Should You Consider Refinancing Your Car Loan

  • If you’ve improved your credit score:

Nowadays, many auto lenders offer tiered rates based on the customer’s credit rating. This means that if your credit rating has improved since the time you took out a car loan, you may qualify for refinancing to a product that offers a low rate to those with good credit.

  • You switch to a shorter duration:

The key to refinancing your car loan at a lower rate is to make sure you choose a term shorter than the one you currently have. That way, by keeping your repayment the same (or close to), you’ll end up paying off your loan sooner while saving interest.

RELATED ARTICLE: New Car Loans That May Match Your Price Range in 2021

Want to explore some auto loan options now? Take a look at these products below or go to our low interest auto loans comparison page for more lenders.


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