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How to refinance your car (with simple steps + examples)

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Happy young African couple showing-off their car keys in their newly financed car

Did someone tell you that you could save money by refinancing your car?

They’re right. You could. But it depends on a couple of things.

So let’s provide more context, share a couple of examples, and break down how to refinance your car.

Here we go.


What is car refinancing?

Car refinancing is the process of taking out a new auto loan, typically with a lower interest rate or better repayment terms, to pay off an existing car loan (or financing agreement).

In most cases, the borrower will refinance their car to benefit from a lower monthly repayment, which means that their car instalment will cost less each month, or they’ll use car refinancing to lock in a shorter loan term.

Bonus: If you’re interested in lowering your monthly car instalment, then debt review could be a better option. Check out this article on how debt review works.


Car refinancing definition


Sounds pretty cool, right? 

It can be, but car refinancing comes at a cost.

The cost: Auto loan refinance fees. So do your maths and consider the costs vs benefits before jumping in into the next car refinancing deal that you find.

To make the concept of car refinancing sink in, we’ll cover two examples in a moment. But first, let’s start with the car refinancing process.


How to refinance your car

Here are the steps that you can follow if you want to refinance your car:

  1. Do your research (find and compare interest rates, fees, and terms that various lenders offer).
  2. Pick the best lender and apply for a new car loan.
  3. If approved, carefully review the terms of the new loan before signing (make sure that it is better and that the benefits outweigh the costs).
  4. Use the money from your new loan to pay off your old car financing loan.
  5. Pay off your car refinancing according to the new terms.


That’s it.

It is basically the same as regular car financing, except this time, you need to account for the differences between the financing agreement (plus the cost) to make sure that your new car loan has more favourable terms than the old one.


How to refinance your car


Compare the numbers first, and then review then carefully review the contracts.

Ideally, you want to save money in the long run and secure similar or more favourable terms.

Now that you’re confident about the process let’s review the potential costs.


Does it cost money to refinance a car?

Yes, there are several fees that may be included when you refinance your car. These fees may include:

  • Application fee
  • Legal fee
  • Valuation fee
  • Initiation fee
  • Guarantee fee
  • Early settlement fee
  • Credit life insurance


Remember, not all lenders structure things the same way, so these fees typically vary depending on the lender or the loan.


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Auto loan refinance fees

Here’s a table with definitions for each:

Fee Description:
Application fee Charged by the lender to cover the costs of processing the loan application.
Legal fee Covers the costs of drafting the loan agreement and registering the loan with the National Credit Regulator (NCR).
Valuation fee Charged by the lender to have the vehicle valued by an independent evaluator.
Initiation fee Charged to cover the cost of setting up the loan.
Guarantee fee Charged for a guarantee product that the lender may require.
Early settlement fee Charged by the lender if the borrower pays off the loan before the end of the loan term.
Credit life insurance For insurance that covers the outstanding balance of the loan in case of the borrower’s death or permanent disability.


Examples of car financing and refinancing

Generally, you’ll have already financed a car before you’d want to refinance a car. So let’s start there. First, we’ll go over a car financing example, then, we’ll look at what car refinancing might look like (based on the first example).

This will make it clear.


Example of car financing

Meet Sam. Sam wants to buy a car but doesn’t have enough cash. So, she decides to finance the purchase of her car by taking out a car loan.

Sam goes to a lender (like a bank) and applies for a loan, and the bank approves Sam for the car loan.

Here are the terms:

  • Total loan amount: R200,000
  • Interest rate: 8% per annum*
  • The loan term is: 60 months
  • Monthly repayment: R3,966.00


*per annum means: ‘for each year’, so a total of 8% in interest must be repaid each year.

Perfect. So Sam is on the hook for R3,966.00 over 60 months, but she’s got a new set of wheels!

Now, how can car refinancing make it even better?

Let’s look at a car refinancing example.


Example of refinancing

This example builds on the one we just shared.

[One year later]


One year later


Sam’s been paying off her car loan for a year, and now she wants to find out if she can get a better deal.

She does her research, applies for a new loan (with a new lender), and gets approved.

Here are her car refinancing terms:

  • Total loan amount: R200,000
  • Interest rate: 6% per annum
  • The loan term is: 60 months


Did you notice that the interest rate went down from 8% to 6%?

This means that Sam’s monthly repayment goes from R3,966.00 to R3,622.00.

What a deal, right?! Not so fast, let’s look at the feed to make sure that car refinancing really is the better option.

Sam has to pay the lender an initiation fee of R5,000, a legal fee of R2,000 and a guarantee fee of R1,000 for the refinancing. The total comes to R8,000.

So here’s the Maths:

  • Loan #1 total cost: R237,960
  • Loan # 2 total cost: R217,320
  • Interest cost (the difference between the two loans): R20,640
  • Auto loan refinance fees: R8,000


This means that Sam’s net savings would be R12,640 after considering the fees he paid for refinancing the loan.

Therefore, Sam did get a better deal by refinancing her car in this example.

What if you weren’t interested in vehicle refinancing and wanted to return your car instead, could you do it?


Can I return a financed car in South Africa?

Yes, it is possible to return a financed car in South Africa, but it depends on the terms of your initial loan agreement and your ability as the borrower to pay off the outstanding balance of the loan.

Check the terms of your car loan agreement or get on a call with your lender. If your loan agreement is outside of its’ cooling-off period, then returning your car might come at an extra cost.


Final thoughts

And that is how to refinance your car, plus a whole lot more. Now you’re informed and ready!

Sidenote, are you considering car refinancing as an option to reduce the cost of your monthly debt repayments?

If so, then you could benefit from debt counselling (debt review). Through debt review, we can help you to reduce \your monthly debt repayments (across nearly all of your debts) — visit My Debt Hero to try our free online assessment and apply.

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