With cost of living rising and interest rates on loans marching ever upward, many Australians are looking to where they can cut back in order to make everyday life that much more affordable.
While interest rates on car loans are typically fixed – and therefore not subject to rate rises in the same way as most home loans – it may still be beneficial to refinance your car loan under certain circumstances.
For example, you may choose to refinance your car loan if the rate on your current loan is much higher than the rate you would get if you applied now. This might be the case if your credit has improved significantly.
Alternatively, you may have got a bad deal on your car finance when you first applied. Perhaps you took up dealer finance because it was easier than taking time to compare the options elsewhere.
Whatever the reason, if you can get a better deal on a new car loan by refinancing, the money you save on your repayments could go a long way to easing your budget elsewhere.
With that being said, there is a right way to refinance your car loan – and many wrong ways. Here are the six mistakes we see most often, and what you can do to avoid them.
Mistake 1. Not checking your credit score
If you apply for a car loan without checking your credit score, you run the risk of having to pay a higher rate on your new loan than you paid on your old loan.
Why? Car lenders apply rates based on both the market and the borrower. Borrowers with good credit are typically rewarded with a lower rate, while borrowers with bad credit usually pay a higher rate.
If your credit score has fallen since you first applied for your car loan, lenders may penalise you with a higher rate on a new loan.
Solution: Check your credit score before you apply so you know exactly where you stand.
Mistake 2. Not checking for break fees on the old loan
Most car loans in Australia are fixed. While some lenders allow borrowers to repay their car loan early with no out-of-pocket fees, many do not.
Depending on your lender and how long you have left on your car loan, you may find that paying off your loan early to refinance to another loan does not make good financial sense.
Solution: Check with your current lender the costs associated with paying off your car loan early. Work out whether it’s worth refinancing before you apply for a new loan.
Mistake 3. Not comparing car loans thoroughly
If you want to get the best deal on your new car loan, you need to compare all your options to see what’s out there. If you don’t, your new repayments may not be as low as your budget would like.
Solution: Take time to compare car loans online. Car Loan World can definitely help with this! Simply tell us what you’re looking for, and we can compare your options to match you with what we think is the best car loan for you.
Mistake 4. Taking the advertised rate at face value
As you compare car loans online, you will most likely use each loan’s advertised rate to find the best deal. However, the advertised rate does not tell the whole story.
Each car loan’s advertised rate is the base amount charged in interest, not taking into account fees and other costs. Using each loan’s comparison rate (a rate that includes interest plus fees and costs) will allow you to better compare your options.
With that being said, it’s worth remembering that the rate you receive may be higher than the comparison rate on the loan. The rate you are given will be determined by factors such as your credit history and current financial circumstances.
Solution: Use the comparison rate to compare car loans. Once you’ve created a shortlist, you can find out your expected rate from each lender. Make sure this will only require a soft credit enquiry, rather than a hard credit enquiry, so it doesn’t affect your credit score.
Mistake 5. Opting for a longer loan than needed
When refinancing your car loan, you can choose how long you want the new loan to last for. Opting for a longer loan term will result in lower repayments, which can make it seem like the best option when your budget is tight.
However, opting for a longer loan typically means paying out more in interest, making the loan more expensive in the long run.
Solution: Use a car loan calculator to compare repayment amounts over varying loan terms. Choose the loan term that gives you repayments you can afford, over the shortest amount of time.
Mistake 6. Not considering the features on offer
While how much you pay in interest and fees is key to refinancing the right way, it’s also important to look at the features on offer. If you don’t, you may end up with a new loan that is as unsuitable as your old loan.
Solution: Think about what you want from your loan, and look at what features are available. As an example, consider whether you might want to make extra repayments, or perhaps pay off the loan early. Look for car loans that will allow you to do this with no penalties applied.