Refinance a car loan to lower repayments

If your car repayments feel too high, refinancing is one option. It is not the only one, and it is not always a good one. The question to ask is simple: am I getting a lower payment because the loan costs less, or because I am paying it for longer?

Two different ways to lower the repayment

Take an example. Two years ago you borrowed $20,000 over five years at 16.95% a year, paid monthly. Your repayment is $496.51. After 24 payments you still owe about $13,936. You have 36 payments left, which add up to $17,874.50. All rates here are examples, indicative only.

Option A: a lower rate, same remaining time. Suppose a new loan of $13,936 at 11.95% over 36 months. The repayment would be $462.55 a month and the total $16,651.65. That is a $33.96 lower payment and $1,222.85 less over the three years.

Option B: the same lower rate, longer term. Take the same $13,936 at 11.95% over 60 months. The repayment drops to $309.65 a month, which is $186.86 less than now. But you would pay $18,578.96 in total, which is $704.46 more than carrying on with the old loan.

Both look like “lower repayments”. Only one costs less. If you cannot afford the old payment, Option B may still be the right call, but go in knowing it costs more.

Add the fees, because they change the answer

Refinancing has costs. Two matter most.

• Set-up fee on the new loan. If it is added to the loan, you pay interest on it too. A $300 fee added to Option A makes the repayment $472.50 and the total $17,010.11. The saving falls from $1,222.85 to $864.39 against staying put.
• Early repayment charge on the old loan. Lenders may charge a fee for paying a loan off early. The law requires it to be a reasonable estimate of the lender’s loss, and it can be large, so ask for the figure in writing. There is more in car loan early repayment fees.

Now try a smaller rate cut. Suppose the new rate is 14.95% over 36 months. The repayment is $482.76, and with the same $300 fee added it is $493.15 with a total of $17,753.45. That saves only $121.05 over three years. A $250 early repayment fee on the old loan would more than wipe it out. In a case like that, staying put is better.

The rule is to add every fee on both sides, work out the new total, and compare it with the total of the old loan from today. If the new total is not lower, the refinance is not saving you money.

When refinancing tends to make sense

• The rate you would pay now is clearly lower than the one you have, by enough to cover the fees.
• Your income or credit situation has improved since you took the loan.
• You are early in the loan, when most of each payment is interest, so there is more to save.
• Your current loan has charges you can avoid, such as a high monthly account fee.

When it often does not

• You are close to the end of the loan. There is little interest left to save, as the last payments are mostly principal.
• The only way to lower the repayment is a much longer term, and the total cost matters to you.
• The fees on the way out and in add up to more than the saving.
• The car is old or has lost a lot of value. Lenders look at the car as well as at you, and may offer less or decline. They decide case by case.
• You owe more than the car is worth. The new lender may not want to lend against it.

What you will need to apply

A new lender usually asks about your income, your living costs and your other debts, and for details of the car and the current loan. Have these ready.

• The payout figure from your current lender, in writing and with the date it is valid to
• Your contract or disclosure statement, which shows the rate, fees and term
• Proof of income, such as recent payslips or bank statements
• Registration and details of the car

By law a lender must check that a loan is suitable and affordable for you before it lends. It has to explain the contract and give you a disclosure statement. Consumer Protection NZ sets out what to expect.

Other ways to bring the repayment down

Refinancing is not the first thing to try if the real problem is a payment you can no longer manage.

1. Ask your current lender. If you are struggling because of something unexpected, such as illness, injury or losing your job, ask about a hardship arrangement. It can mean spreading payments over longer, a payment holiday, or interest-only payments for a set time. Lenders cannot charge you to consider the request. There are time limits, so ask early. See what to do when you can’t afford car repayments.
2. Make extra payments while you can. If your loan allows it, paying a bit extra early reduces the balance and the interest. Check for fees first.
3. Sell or trade down. A cheaper car lowers every payment. If you sell the car, you must still pay out the loan from the sale, and the lender has a security interest in the car until the loan is paid.
4. Get free help. MoneyTalks (0800 345 123) gives free budgeting support, and a financial mentor can go through your numbers with you.

A quick way to compare offers

Put each option into the calculator with the same amount borrowed, then set the rate and the term for each. Write down three numbers for every option: the repayment, the total repaid and the fees. Then add the fees to the total. Choose on the lowest total you can afford to pay, not the lowest payment. The car loan interest calculator is set up for this kind of comparison.

If you would like to see offers from lenders other than your own, our check is a referral service, not a lender or a dealer. One application and one soft credit check go to a panel of NZ lenders. Nobody can promise approval, and lenders decide case by case. The disclosure page explains how we are paid.

Sources

• Consumer Protection NZ: loan for your car for hardship, fees and lender obligations
• Consumer Protection NZ: credit contracts in plain English for early repayment charges
• MoneyTalks for free budgeting help