How to Refinance Your Car Loan

Paying too much for car finance? Sadly, throughout New Zealand, that is all too common. Our guide navigates you through what you need to know, and, most importantly, how you can switch to lower car repayments. How to Refinance Your Car Loan

Our guide to car refinancing aims to help bring down the cost of car loans. We’ve published this guide to explain refinance options available, how to minimize ongoing repayments and reduce the total interest costs you pay. We cover:

Know This First: What Does it Mean to Refinance your Car Loan?

Refinancing your car loan means paying off your existing car loan with another loan. Most people choose this option when they can save money by refinancing. Sometimes it’s a lower rate or better term and other times they need help affording their loan payment, or they risk losing their car.

When done right, you should save hundreds or thousands of dollars by refinancing your car. Before you do, here’s what you should know, including how to tell if refinancing is right for you.

MoneyHub Founder Christopher Walsh shares his comments on car loan refinancing:

“Our team, who talks to many reputable car lenders as part of our research efforts, frequently sees verified 6% p.a. and 7% p.a. car loans offered to New Zealanders nationwide. Paying 12%+ p.a. is hard to justify when challenger lenders offer better terms”.
“A 5% difference in an interest rate on a $10,000 loan saves about $500 every year – this is a significant saving. But, before you refinance, make sure all the costs are clear – sometimes fees can take a bite out of any savings. If you’re in doubt, ask the lender.
“Car finance is useful but it always traps a lot of New Zealanders into long-term debt. For this reason alone you should carefully consider your options and avoid rushing in to any deal. The numbers need to be affordable – ignore everything else and just look at how much it’s going to cost you. Because car loans last for two, three or even five years, making sure you can keep up with the payments is critical to any decision”.

How Does Car Refinancing Work?

When you accept a car finance offer, you can later refinance your car loan with a new loan from any lender. You are under no obligation to stay with the same lender. The first step is to contact a lender (online or in-person) to see what rates and terms you may receive. If you are eligible for a better rate or term than you have now, you can refinance.

Before refinancing, there are some crucial facts to be aware of:

  1. If you have a loan with an early repayment penalty, you’ll need to take this into account. For example, if the fee is $300 and you have $3,000 left to pay on your loan, refinancing will cost the same as 10% of the loan balance, which is most likely to be bad value for money unless you have a very high-interest rate.
  2. You’ll need to make a complete comparison of costs and interest. You may find you still benefit (i.e. save money) refinancing, but you will need to look at the bottom line.
  3. To properly compare, add up the total cost of the car financing; this is the interest charges, loan fees, and early repayment fees (if applicable). If it’s less than the current total financing cost, then it’s probably better you stay.

The difference between existing and new car finance deals is best explained with two examples:

Situation One

  • Mike currently owes $10,000 on his car, and he’s paying 14.95% p.a. interest on the balance.
  • He has 36 months left to repay his loan. Mike’s salary has increased since first applying for the car loan, and he knows the interest rate he is paying is too high.
  • He applies for refinancing as is offered 8.95% p.a. There are no early repayment fees for either loan.
  • There is an application fee of $400; this would be added to the loan balance (bringing it to $10,400) if he goes ahead with the refinancing.
  • He puts together a comparison (see table below)

Situation Two

  • Mike currently owes $10,000 on his car, and he’s paying 14.95% p.a. interest on the balance.
  • In this example, he has 12 months left to repay the loan and is offered 12.95% p.a. by another company.
  • However, there is a $250 early repayment fee if he refinances which will need to be paid to the current car loan company.
  • There is an application fee of $400; this would be added to the loan balance (bringing it to $10,400) if he goes ahead with the refinancing.
  • He puts together a comparison:
Car Finance Terms and Details
Situation One
Situation Two
Loan Amount
$10,000
​$10,000
Interest Rate (existing loan)
14.95% p.a.
14.95% p.a.
Term
36 months
12 months
Current Monthly Repayment
​$346.65
$902.58
Loan Application Fee
$400
$400
Interest Rate (refinancing offer)
8.95% p.a.
​12.95% p.a.
New Monthly Repayment
$330.72
$928.90
Saving Per Month
$15.94
None – the loan is $26.32 more per month
Saving Over Remaining Tern of the Loan
$573.84
None – the loan is $315.84 more expensive over its life compared to the existing finance
Is Refinancing a Better Deal?
Yes
In this situation, it’s clear that refinancing will be more expensive than the existing loan. This is because the upfront loan fee ($400), which is added to the loan balance, is not enough to offset the lower interest rate. In such cases, the most affordable option is likely to be full repayment with the current lender.

Warning: Add-on Insurances: Car Lenders may offer you Mechanical Breakdown Insurance (MBI) and/or Guaranteed Asset Protection Insurance (GAP) when you refinance a loan. We do not believe these policies offer value-for-money or cost-effective protection for most people. Our guides to both of these insurance options explain what you need to know. You may be encouraged to buy MBI and/or GAP insurance, but they are not compulsory with any car loan. Our view is that buying add-on insurance makes a car loan more expensive.

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