How Car Loan Refinancing Works
Refinancing a car loan means replacing your existing loan with a new one, usually from a different lender, at a lower interest rate or with different terms. The new lender pays out the old loan and you begin making repayments on the new loan. The main reasons people refinance are to reduce their monthly payment, to lower the total interest paid, or both.
The calculation this tool uses is the standard loan amortisation formula. For a loan of principal P at monthly interest rate r over n months, the monthly payment M is:
M = P × r(1 + r)n / ((1 + r)n - 1)
where r = annual rate / 12 / 100. Total interest is (M × n) - P. The break-even period is the total refinancing fees divided by the monthly saving.
What to Check Before Refinancing
- Early repayment fee: Fixed-rate loans often charge a fee if you repay early. Check your loan contract before applying anywhere. Some lenders charge a flat fee; others charge a percentage of the outstanding balance.
- Establishment fee on the new loan: Most NZ lenders charge $100 to $350 to set up a new personal loan. Add this to the break-even calculation.
- PPSR registration: If your new lender registers a security interest over the vehicle, there is a small PPSR registration fee (currently around $10 online).
- Remaining vehicle value: Some lenders require the vehicle to be less than a certain age (often 10 to 12 years) and above a minimum value. If your car has depreciated significantly, refinancing may not be available.
- Your credit score: Refinancing works best when your credit score has improved since you took out the original loan, allowing you to qualify for a lower rate.
Worked Example
You have $18,000 remaining on a car loan at 12.5% p.a. with 36 months left. A new lender offers 8.9% p.a. for 36 months with a $200 establishment fee and no early repayment penalty on your current loan.
| Item | Current Loan | New Loan |
|---|
| Principal | $18,000 | $18,000 |
| Rate | 12.5% p.a. | 8.9% p.a. |
| Term | 36 months | 36 months |
| Monthly payment | $602.17 | $571.56 |
| Total repayments | $21,677.95 | $20,576.08 |
| Total interest | $3,677.95 | $2,576.08 |
| Fees | - | $200.00 |
| Net saving | $901.87 over the loan term |
| Break-even | 7 months ($200 / $30.61 saving) |
In this example, refinancing saves approximately $902 over the remaining term. The break-even point on the $200 fee is roughly 7 months, well within the 36-month remaining term.
When Refinancing May Not Help
Extending the loan term to lower monthly payments can increase the total interest you pay, even at a lower rate. This tool shows total interest for both loans so you can see the full picture. If you are close to the end of your current loan, the interest saving is smaller and the fees may outweigh the benefit. Also, if your vehicle has depreciated to a level where you owe more than it is worth, some lenders may decline to refinance, or may require you to make a cash payment to reduce the balance.
Related Calculators
Sources and method: Standard loan amortisation formula (M = P × r(1+r)n / ((1+r)n - 1)). Break-even = total refinancing fees / monthly payment saving. Rates used in examples are illustrative; actual rates vary by lender and creditworthiness. Check sorted.org.nz for a comparison of NZ personal loan rates.
This calculator provides indicative estimates only. It does not constitute financial advice. Actual loan terms, fees, and eligibility depend on your lender and individual circumstances. Seek independent financial advice before refinancing.
