What is car refinancing? Could it help lower your monthly payments?

Car refinancing is the process of replacing your current car loan with another in order to reduce your monthly payments. In effect, you’re taking out one car loan to pay off another.

It can also enable you to switch from a personal contract purchase (PCP) to hire purchase (HP) – or vice versa. And if you’re on a PCP, you could even borrow the money to make your optional final payment in order to keep your car.

Refinancing can also help if you’re struggling to keep up with your repayments, and can be less costly and complex than simply handing your car back.

However, if you are struggling to meet your financial commitments, you should always speak to your current lender first, because they may be able to offer assistance. Indeed, some will try to retain your business, and may be able to offer a more attractive refinancing package. But regardless, it pays to shop around.

You can choose to use a specialist refinancing lender, which will provide finance secured on the car, or you could opt for a personal loan, which wouldn’t be secured on the car. The difference here is a secured loan uses the car as security, meaning the car can be repossessed if you don’t make your repayments; unsecured personal loans don’t have this level of security, and can attract higher interest rates to cover the additional risk.

How to refinance your car

The process of refinancing your car is no harder than taking out your original car finance agreement, and the steps you need to take aren’t really all that different. Here are the key steps:

1. Speak to your current car finance lender to get a settlement quote – this will be the amount you’ll need to borrow from the new lender

2. Understand the costs of switching. Your monthly payments will be based on the APR interest rate, the amount you want to borrow and how long you want to borrow it for. Your credit rating will play a part: the better your rating, the better the refinancing rates you can expect.

3. Find a car refinance lender. There are a number of big-name banks that offer this service, as well as some specialist lenders. Many will offer online calculators to make it clear exactly what you’re borrowing and how much it will cost you per month – and in total.

4. Gather all your personal information and information about your car

5. Apply for car refinancing online. This will involve a credit check.

6. Carefully review and understand the terms before signing the loan agreement

7. Many refinancing lenders will settle your existing loan directly, but always check this to avoid paying two sets of loans concurrently – or to accidentally default on one of them

8. Start making those payments

Pros and cons of car refinancing

Advantages of car refinancing

- You could reduce your monthly payments significantly
- If your credit rating has improved since you took out your previous finance agreement, you could access better rates
- You can borrow to cover the cost of your optional final payment (also known as a balloon payment) on a PCP, meaning you can keep your car without having to pay a large lump sum in one go

Disadvantages of car refinancing

- A refinancing deal may not necessarily be any better than your current one, especially when interest rates are fluctuating
- Increasing the length of your loan can mean paying more interest overall
- Car refinancing deals are secured on the car, meaning if you stop making payments, the car can be repossessed. While unsecured personal loans aren’t secured against the car, they may attract higher interest rates as a result
- You may be hit with an early repayment fee if you refinance before the end of your current deal
- It can be difficult to secure refinancing if you have a worse credit score than when you took out the original finance, or if your car is in negative equity

What do I need to refinance my car?

Each lender will have their own set of criteria to process a car refinancing application, but as a rule of thumb you’ll need:

- To be at least 18 years old
- To have lived in the UK for at least three years, and be able to provide proof of your current and previous addresses
- Proof of your identify, such as a passport or driving licence
- Your car’s details, including the make, model and registration number, plus its current mileage
- Proof of insurance; it’s likely the lender will require you to have fully-comprehensive cover
- A letter from your current provider outlining the settlement amount and how long the agreement has to run
- Your bank details
- You employment details, typically covering the last three years
 

Car refinancing FAQs

Can I get car refinancing with bad credit?

Yes, but it can be tricky or expensive. Many mainstream lenders will favour customers with good credit ratings, but there are specialists who provide bad credit car refinancing. However, these will typically attract higher interest rates so can be more costly.

Is it worth refinancing my car?

Whether it’s worth refinancing your car depends on your personal circumstances and the market conditions at the time. Assuming you can find a deal with a lower interest rate or one that stretches over a longer term, and that any settlement fees are minimal, car refinancing could be financially beneficial.

However, you should shop around for the best deal, fully understand what you’re signing up for, and how much it will cost you –  both per month and in total. And don’t forget to factor any early repayment fees.

When can I refinance my car?

Theoretically you can refinance at any time, but check your terms and conditions, because some lenders may insist you remain with them for a set period. You should also check if you will have to pay any early repayment fees.

Does refinancing harm my credit score?

Any kind of credit check can potentially reduce your credit score, albeit only usually for a short period of time. However, if you make your refinancing repayments on time and in full, your credit score could even improve over time. There are services online that can check your credit score for free.

Can I take out GAP insurance for refinancing?

Yes. GAP insurance providers, such as ALA Insurance, will be able to provide GAP (guaranteed asset protection) against a new car refinancing policy.

However, the qualification period for the GAP cover is based on when you first took ownership of the car. That means in most cases, if you've had the car for more than 180 days the type of cover offered would be limited to Agreed Value GAP and won't specifically cover any finance. 

It’s important to note that if you took GAP out on the original policy, the cover won’t extend to any interest associated with the new finance agreement. From that point, the car would be treated as a cash purchase.

Can I refinance with a different lender?

Yes – many car owners refinance with another lender. Indeed one of the benefits of refinancing is that you can shop around for the best deals, comparing rates and terms from a number of lenders. However, you should speak to your current lender first, because they may be able to renegotiate your current deal and move you to better terms.

Can I refinance my balloon payment?

Yes, you can usually apply for refinancing to pay your optional final payment – also called the balloon payment – which is one of several options you have at the end of a PCP finance agreement. Many car buyers don’t make this payment, but refinancing the outstanding sum could allow you to keep your car without having to find a large sum of money.

To do this, firstly speak to your current lender to discuss your options, although you can also seek out new lenders offering more favourable terms.

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Read more: What is PCP finance?