Refinancing a car loan with bad credit in NZ
Refinancing means a new loan pays out your old one. With bad credit it is sometimes possible, but it only helps if the new deal costs you less overall or fixes a real problem. Nobody can promise approval, so look at cheaper first steps, like asking your current lender to change the loan, before you apply.
Most people searching for this are in one of two spots. They took a car loan on tough terms because that was what was on offer, and now they want a better deal. Or they are struggling with the payments and hope a new loan will ease them. Those are different problems, and refinancing helps one far more than the other.
This page explains what refinancing is, what to check before you do it, and what to try first. For how lenders set the rate on a weaker file, see bad credit car loan interest rates. If you are already behind, read what happens if you default on car finance.
What refinancing means
You take out a new loan, and its money pays off the old one. After that, you owe the new lender instead. The new loan can come from your current lender, from a different one, or as a personal loan used to clear the car loan. The car usually stays the same.
A refinance can be worth doing when:
- the new rate is clearly lower than the old one, after fees
- your credit file has improved since you took the first loan
- you want to remove a balloon payment that is coming up
- you want a simpler, more flexible set of terms
It is a poor idea when:
- the only change is a longer term with the same or higher rate
- fees take away the saving
- you owe far more than the car is worth
- the real problem is that your income has dropped and the budget is out
Cheaper steps before you refinance
Consumer Protection’s advice for anyone struggling is to tell the lender as soon as you can. Many lenders would rather change the repayments than chase missed ones. You can ask your current lender for:
- more time to pay
- a smaller amount over a longer period
- a repayment holiday
- interest-only payments for a while
Extra interest and admin fees may apply, so ask what the total cost will be. If something has happened like losing work, serious illness or injury, or a relationship breakdown, you can make a hardship application in writing, with proof. The lender must tell you its decision and reasons within 20 working days, and must pause repossession while it decides.
None of this needs a credit check by a new lender, so it does not leave a fresh enquiry on your file. It is worth trying before anything else.
What to check before you swap loans
1. Your settlement figure
Ask your current lender for a written payout figure, with the date it is valid to. It will be different from the balance on your last statement, because of interest to the date and any fees.
2. Early repayment charges
Ask in writing whether there is an early repayment charge, and how it is worked out. Consumer Protection says such fees should be reasonable and related to actual costs. If a charge looks high, you can raise it with the lender.
3. The rate and the fees on the new loan
Look for establishment fees, monthly or per-payment fees, missed-payment fees and early payoff fees. A lower rate with a high upfront fee can cost more than the loan you already have. Under the law, the lender must give you a disclosure statement showing the amount owing, the payment terms, the interest rate and how it is calculated, all fees and charges, and any penalties.
4. The term
A longer term lowers the weekly payment, but you pay more interest in total. The table below shows why. The figures are illustrative only, with a made-up rate, and are not a quote.
| Illustrative balance | Rate | Term | About per week | Total repaid |
|---|---|---|---|---|
| $8,000 | 24% a year | 2 years | $94 | about $9,800 |
| $8,000 | 24% a year | 4 years | $55 | about $11,400 |
The longer term saves about $39 a week and costs about $1,600 more. It might still be the right call if the weekly budget is the problem. The point is to make that choice with both numbers in front of you.
5. What the car is worth
Check your car’s value against what you owe. If you owe more than the car is worth, a new lender is unlikely to cover the gap by itself. The lender will normally hold a security interest in the car, and its value matters to the decision.
6. What the new lender can take
Consumer Protection suggests avoiding a loan that needs a guarantor, or a lender that takes security over your other belongings. A guarantor becomes responsible if you cannot pay, which puts a friend or family member at risk.
What a new lender will look at
A new lender treats a refinance as a fresh application. The Financial Markets Authority says lenders can ask about your income, expenses, existing debts and personal circumstances, and can ask for bank statements and permission to check your credit history. Lenders also have a duty to make reasonable enquiries about whether the loan suits you and whether you can afford it.
With a weaker file, these things tend to help:
- a run of on-time payments on the current loan, since any trouble
- steady income, shown by payslips or bank statements
- no new defaults
- a loan that is not much bigger than the car’s value
A full application can leave an enquiry on your file, which stays for up to four years at Equifax. Applying to several lenders close together can make a file look riskier. Check your reports first, using our guide to checking your credit score for free, and apply once.
Refinancing in special situations
After a default. A default shows on your file for five years, even once paid. Lenders weigh how recent it is and whether you have cleared it. Our page on car finance after a default goes through this.
After bankruptcy. While you are bankrupt, we cannot help. Once you have been discharged, or a No Asset Procedure has ended, details can be passed on. The page on car finance after bankruptcy explains where the line is.
When the car has been repossessed. Refinancing is no longer the question. See get my car back after repossession for the options and the short window to use them.
Other ways to ease the load
- A free financial mentor. MoneyTalks, on 0800 345 123, is free and confidential. A mentor can build a budget and speak to the lender on your behalf.
- Good Shepherd’s Good Loans. These are no-interest, fee-free loans for essentials, up to $7,000, with income limits and other conditions. Check goodshepherd.org.nz for the current criteria. They are aimed at essentials and may not suit paying out an existing finance contract, so ask first.
- Work and Income. If you receive a payment and your costs have risen, ask what help is open to you.
- Selling the car and buying a cheaper one, if the loan is too heavy. Check the payout figure first, because a financed car cannot be sold freely until the loan is cleared.
- A budgeting service to find the room in your weekly costs.
Red flags
- A “refinance” offer that takes security over your other belongings as well as the car.
- A high-cost loan, with an annual rate of 50% or more, pitched as a quick fix. Lenders cannot ask you to repay more than twice what you borrowed, but the cost can still be steep.
- Fees paid upfront before you have seen a written offer.
- Pressure to sign today.
- A lender that is not on the Financial Service Providers Register.
- Anyone who promises approval before looking at your situation.
A simple order to work through
- Ask your current lender about changing the loan or hardship.
- Get a written payout figure and ask about exit fees.
- Check your credit reports and fix any errors.
- Work out the weekly figure you can afford, and the total you would repay.
- Compare any offer against the loan you already have, in total dollars.
- Apply once, to a lender that suits your situation.
Where we fit
We are a referral service, not a lender. If you want to talk through what is on offer, answer four quick questions at our check. It is not a credit application. A broker partner can then call you to talk it through, and lenders make their own decisions. You see the rate, fees and repayments before you sign, and you pay us nothing. See how we are paid.
Sources
Common questions
Sometimes. A new lender looks at your income, expenses, debts and credit file as if it were a fresh application, and each lender decides for itself. Nobody can promise approval, and the terms for a weaker file are often less generous than the loan you already have.
It can, usually by stretching the loan over a longer term. That lowers the weekly figure but increases the total you repay. Always compare the total cost, not only the weekly amount.
Possibly. Consumer Protection says fees, including early repayment charges, should be reasonable and related to actual costs. Ask your current lender for a written settlement figure and a list of any exit fees before you commit to a new loan.
It is harder. A lender will see the missed payments, and if the car is already under a warning notice, time is tight. Ask your current lender about hardship first, because it must pause repossession while it decides and has 20 working days to answer.
That is called negative equity, and it limits your choices. A new lender is unlikely to lend more than the car is worth without something extra, so you may need to keep the current loan, pay it down, or talk to a financial mentor about the best way forward.