How to Refinance a Car Loan: When It Saves You Money (and When It Doesn't)

You're a year or two into your car loan. You've made every repayment on time. And you're starting to wonder: could I be getting a better deal?

Maybe. But refinancing a car loan isn't as straightforward as switching energy providers. There are a few things working in your favour, and a few that might be working against you. Here's how to figure out which side you're on.

Three good reasons to refinance

Your credit profile has improved

If you've been making consistent repayments for 12 months or more, your credit score has likely improved since you first applied. That matters because the rate you were offered originally reflected who you were then, not who you are now.

A borrower who's gone from a fair credit score to a good one could see a meaningful drop in rate. On a $30,000 loan with three years remaining, moving from 9.5% to 7% saves roughly $1,100 in total interest. That's real money back in your pocket.

You have a balloon payment coming due

A balloon payment is a lump sum due at the end of your loan, typically 20% to 40% of the original amount. On a $35,000 car loan, that could mean $7,000 to $14,000 landing all at once.

If you don't have that cash sitting in savings, refinancing is usually the path forward. You roll the balloon into a new loan and spread the remaining balance over a fresh term. Just keep in mind that you're now paying interest on that balloon amount, so the total cost of the car goes up. The alternative, though, is defaulting on the balloon or being forced to sell the vehicle.

You locked in a high fixed rate

If you took out a fixed-rate car loan during 2021 or 2022, you might have locked in a rate that seemed fine at the time but doesn't stack up well today. Fixed rates during that period varied widely depending on the lender, and some borrowers ended up on rates above 8% or 9% for the full term.

If your fixed term is ending or you're paying a rate well above what's currently available for your profile, refinancing could bring your repayments down. The average car loan rate in Australia right now is around 7.5% to 8.5%, but borrowers with strong credit on secured loans can do better than that.

What can work against you

Your car is now "used" in the lender's eyes

This is the one most people miss. When you bought the car, you probably got a "new car" rate. But when you refinance two or three years later, the car is no longer new. The new lender classifies it as a used vehicle, and used car rates are typically higher.

So even if your credit is better, the rate tier has shifted underneath you. The improvement from a stronger credit profile might be partially, or even fully, offset by the used car premium. You need to compare the actual rate you're being offered, not just assume it'll be lower because your credit improved.

The car has depreciated faster than your loan balance

Cars lose value. New cars especially, often dropping 20% to 30% in the first year alone. If you owe $25,000 on a car that's now worth $20,000, you're in negative equity. That means the loan-to-value ratio (the amount you owe compared to what the car is worth) is above 100%.

Lenders don't love that. Some won't refinance at all when the LVR is too high. Others will, but at a higher rate to account for the risk. Before you apply, check what your car is realistically worth, not what you paid for it.

Your credit profile has gotten worse

Refinancing assumes your position has improved. But if you've missed payments on other debts, taken on buy now, pay later accounts, or increased your credit card balances since the original loan, your credit profile might be weaker than it was. A new lender will assess you fresh, and a worse profile means a worse rate, or a decline.

How to figure out if it's worth it

Before you call anyone, do this:

1. Get your payout figure. Call your current lender and ask for your payout amount. This isn't the same as your loan balance. The payout figure includes accrued interest and any early exit fees. That's the number you need to beat.

2. Check your car's current value. Look up your make, model, year, and kilometres on a site like RedBook or CarsGuide. Be honest about condition. This tells you your LVR, which tells you what rates you're likely to qualify for.

3. Get a comparison rate quote. Ask for the comparison rate, not just the advertised rate. The comparison rate includes fees and charges, so it's the closest thing to a true cost-of-borrowing number. Get quotes from at least two lenders.

4. Do the total cost maths. Don't just compare monthly repayments. If refinancing extends your term, you might pay less per month but more in total. A $25,000 refinance at 7.5% over four years costs about $3,950 in interest. The same amount over five years at the same rate costs $5,000. That extra year adds over $1,000 in interest on a depreciating asset.

5. Factor in all the costs. Your current lender might charge an early exit fee. The new lender will charge an establishment fee and PPSR registration (usually $10 to $20). Small numbers on their own, but they add up and eat into your savings.

What to do next

If the numbers work, refinancing can genuinely save you money or get you out of a balloon payment you can't cover. If the numbers don't work, at least you know, and you can revisit in six to twelve months when more of the loan is paid down.

The key is running the numbers before you commit, not after. If you'd like help comparing what's available for your situation, Emu Money's finance specialists can check rates across 50+ lenders in a few minutes. Compare car loan options.