Refinancing: How to Lower Your Interest Rate and Save on Repayments
If you’re feeling the pinch of high-interest rates on your car loan, business loan or credit card, you’re not alone. Many Australians have signed up for loans at rates that are far from competitive, and they may not even realise they could be paying much less.
One common solution is refinancing, which involves obtaining a new loan with a lower interest rate to replace an existing loan.
At Flow Financial Services, we’ve been helping customers refinance car loans, credit card debt, asset loans and business loans to secure lower interest rates and reduce repayments. If you’re wondering whether refinancing is right for you, this guide will walk you through everything you need to know.
What Is Refinancing?
Refinancing simply means replacing an existing loan with a new one—often with better terms. One example is car loan refinancing, a process where borrowers can apply for a new car loan with better terms, particularly a lower interest rate, to pay off an existing car loan. This could mean:
- A lower interest rate
- Reduced monthly repayments
- Access to better loan features
- Consolidating multiple debts into one
By refinancing, you can free up cash flow, reduce financial stress, and even pay off your loan faster.
Signs You Should Consider Refinancing
Wondering if refinancing is right for you? Here are some common signs that it might be time to make the switch:
- Your interest rate is higher than the market average – If rates have dropped since you took out your loan, you might be overpaying.
- Your repayments are stretching your budget – Refinancing could help lower your repayments and give you breathing room.
- You’re paying for features you don’t use – Some loans charge extra for features like offset accounts or redraw facilities that you may not even need.
- You want to pay off your loan faster – Switching to a lower rate or a different loan structure could help you clear your debt sooner.
- Your fixed rate is about to expire – If your fixed-rate term is ending, now is the perfect time to shop around for a better deal.
- You have high-interest debts – Refinancing can help you consolidate credit cards or personal loans into one manageable repayment.
- Consider early exit fees – Understanding any early exit fees is crucial as they may negate the potential savings from switching lenders. Evaluate the overall cost of refinancing, including fees associated with both the current and new loans, before making a commitment.
Eligibility Criteria for Refinancing
Refinancing a loan can be a great way to save money and improve your financial situation, but it’s essential to meet the eligibility criteria set by lenders. Here are some key factors to consider:
- Credit Score: A good credit score is crucial for refinancing. Lenders use credit scores to assess the risk of lending to you, and a higher score can help you qualify for better interest rates and terms. If your credit score has improved since you took out your existing car loan or other type of loan, you might be in a better position to refinance at a lower interest rate.
- Income: You’ll need to demonstrate a stable income to show that you can afford the loan repayments. This may include providing proof of employment, payslips, and bank statements. Lenders want to ensure that you have a reliable source of income to cover your repayments without financial strain.
- Loan-to-Value (LVR) Ratio: The LVR ratio is the amount you owe on your current loan compared to the current value of your asset. A lower LVR ratio is generally preferred by lenders, as it reduces their risk. For example, if your car has retained its value well or you’ve paid down a significant portion of your loan, you might find it easier to refinance your car loan.
- Vehicle Age and Condition: If you’re refinancing a car loan, the age and condition of your vehicle can affect your eligibility for refinancing. Some lenders may have restrictions on the age or mileage of the vehicle. Generally, newer cars in good condition are more likely to qualify for refinancing, as they represent a lower risk to the lender.
- Existing Loan: You’ll need to provide details of your existing loan, including the loan amount, interest rate, and repayment schedule. This information helps lenders assess your current financial obligations and determine the potential benefits of refinancing.
By understanding these eligibility criteria, you can better prepare yourself for the refinancing process and increase your chances of securing new finance with more favorable terms.
How Much Can Refinancing Save You?
Let’s look at an example:
Suppose you have a $40,000 car loan with a 7% interest rate over 5 years. Your monthly repayment would be around $792.
If you refinance to a 5.5% interest rate, your new repayment could be $764—saving you $28 per month or over $1,680 over the life of the loan!
Even a small rate reduction can add up to significant savings over time.
What’s Involved in Refinancing?
The refinancing process is more straightforward than you might think:
1. Assess Your Current Loan
First, we review your current loan, interest rate, fees, and loan features to see where you stand.
2. Compare Lenders and Loan Options
Then, we compare multiple lenders to find the best loan for your needs. This includes looking at:
- Interest rates
- Fees (including exit fees from your current lender)
- Loan features (like offset accounts and redraw facilities)
- Fixed vs. variable options
3. Submit Your Application
Once we find the right loan, we handle the application process for you, making it as simple and stress-free as possible.
4. Approval and Settlement
Your new lender will approve your application, and your old loan will be paid out. From there, you’ll start making repayments under the new, lower rate.
Common Refinancing Myths (and the Truth!)
“Refinancing is too complicated.”
The process is simpler than you think, especially when you work with an experienced broker who does the heavy lifting for you.
“I need a perfect credit score to refinance.”
While a good credit score helps, many lenders offer refinancing options even if your credit isn’t perfect. An unsecured loan is a type of loan that does not require an asset as collateral. While both types of loans are assessed based on the borrower’s income and repayment ability, secured loans tend to offer lower interest rates due to the presence of collateral.
“It’s not worth refinancing for a small drop in interest rates.”
Even a 0.5% decrease can save you thousands over the life of your loan.
“I’ll have to restart my loan term.”
You can choose to keep the same loan term or even shorten it to pay off your loan faster.
How Flow Financial Services Can Help
Refinancing can be a game-changer for your finances, but the key is getting the right loan for your needs. That’s where we come in.
At Flow Financial Services, we:
- Compare multiple, trusted lenders to find you the best rate
- Take care of all the paperwork and legwork
- Ensure you’re not overpaying on unnecessary fees
Help you transition smoothly with minimal hassle
Is Now the Right Time to Refinance?
The best time to refinance is when you can secure a lower rate, better loan terms, or improve your financial position. If your current loan isn’t working for you anymore, now is the time to explore your options.
Want to see how much you could save? Contact Flow Financial Services today for a no-obligation refinancing assessment!
