Is refinancing a car loan worth it?

couple working out refinanced car loan repayments

In this current low-rate environment, refinancing has become common practice for many home loan holders to shave thousands off their mortgage. 

But is refinancing your car loan a good idea? 


Let’s take a look at the numbers: 

Since 2016, there have been eight cuts made to the Reserve Bank of Australia’s (RBA) official cash rate. It now sits at an historic low of 0.10% from 2.00%. 

The current average variable car loan rate for new and used vehicles sits at 6.68%. When you compare that to the average rate at the same time five years ago, 7.82% - that’s a 1.14% difference.  

In the case of home loan interest rates, the current average variable rate is 3.30% from 4.72% five years ago. While that is a 1.42% difference, the small margin can make a significant difference because home loans are generally around 25 to 30 years. 

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

We’ve weighed it up. 

Why refinancing a car could be a bad idea 

  • You may not save that much: 

As mentioned above, car loan rates have remained low over the last five years with minimal movement. So, you may not end up shaving off that much by refinancing, like you would with a mortgage, as terms are shorter, between one to 10 years. This means that the period of time to save is a lot less. So overall it may end up only being a few hundred dollars - which could be the cost of applying for a new loan anyway. 

Take this for example: 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 this rate, you would pay $938 per month and $3,754 in interest overall. If you refinanced from a loan with a 6.68% rate, you’d pay $922 and $3,189 in interest. That’s a savings of $16 per month and $565 in interest. 

Currently on the Mozo database, application or establishment costs for car loans range between $0 and $995. So the saving may be even less if you need to front up a fee. 

  • Refinancing new to used: 

If you are planning on refinancing a new car loan, it’s likely that you’d have to refinance to a used car loan - as your car is no longer new. Generally, used car loans come with higher interest rates than new car loans, so you may not be able to find a lower rate. 

For example, the average variable new car loan rate sits at 6.33% on the Mozo database. On the other hand, the average for used vehicles is 6.83%.

When you should consider refinancing your car loan 

  • If you have improved your credit score: 

These days, a bunch of car loan lenders offer tiered rates that are based on a customer's credit score. This means that if your credit rating has improved since the time you took out a car loan, you may benefit from refinancing to a product that offers a low rate to those with good credit.  

  • You switch to a shorter term: 

The key to refinancing your car loan for a lower rate is to ensure that you choose a shorter term to the one you currently have. That way, by keeping your repayment the same (or close to) you’ll end up paying down your loan earlier as well as saving yourself in interest.

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    5.22% p.a.based on $30,000
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    Secured Car Loan

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    5.35% p.a.
    5.65% p.a.based on $30,000
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    Secured Car Loan

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    7.16% p.a.based on $30,000
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