Car refinancing

If you’re looking to save money on your car finance deal, refinancing could be the answer. In this guide we look at what car refinancing is, how it can save you money and the pros and cons.

What is car refinancing?

Car refinancing is when you take out a new car finance deal to pay off your existing deal. You might want to do this if you think a new deal could save you money or if your needs have changed.

How car refinancing can save you money

If you’re thinking of refinancing your car deal, it’s a good idea to first check if there are any early repayment fees on your existing deal. If there are, you need to factor this in when working out if a new deal will work out cheaper.

If you switch to a new car finance deal where you pay less interest this may save you money*. It could be that you’re now able to apply for a personal loan which may work out cheaper than a car finance deal.

Another way you may be able to save money is if your credit score has improved. If you’ve kept up the repayments on your existing loan and paid on time, this could have improved your credit score. Refinancing may mean you can now get a loan with a lower interest rate. This will reduce your monthly repayments and may also reduce the overall amount you have to repay*. Find out more about how to improve your credit score in our guide.

If you’re not able to switch to a lower interest rate deal you may be able to cut your monthly costs by taking out a longer loan. This would reduce your monthly repayments, but you’ll be paying interest on the loan for longer and it will take you longer to clear the debt. The extra interest payments are also likely to end up increasing the total cost of the loan.

Other reasons to consider refinancing your car deal

As well as saving money, there are other reasons why you might want to refinance your car deal.

Change the terms of your car finance deal

If you’re on a hire purchase (HP) or personal contract purchase (PCP) deal, you don’t own your car until you’ve paid off the loan in full. If you want to own the car before this, you could refinance by taking out a personal loan that pays-off your finance deal and leaves you as the car’s owner. You’ll then have to repay the loan but the car will be yours. Find out about the different types of car finance in our guide.

Paying for your car at the end of a HP or PCP agreement

HP and PCP car finance deals are different to personal loans. With a personal loan you can sell your car at any time.

With a HP or PCP car finance deal you cannot sell your car during the term of the deal. But you can hand back the car to the finance company during the lifetime of your deal which is not an option with a personal loan.

When you come to the end of a HP or PCP deal you either have to give back the car to the car finance company or pay a lump sum (known as a balloon payment) to keep it.

If you don’t have the cash to cover the balloon payment you could consider a personal loan. This will enable you to keep the car but you need to make sure the monthly repayments on the loan are manageable.

Refinance your car deal so it’s in your name only

If you took out a joint finance deal with someone else but now want a loan that’s just in your name, you’ll need to refinance. This involves taking out a new loan in your name only and using this to pay off the old deal.

How does a car refinance work?

The process of refinancing is pretty straightforward. You apply for a new deal or loan – this can be with your existing provider or more usually with a different provider. If you’re accepted, the finance company will handle the arrangements. They will pay off your old finance deal in full and you then start making the monthly repayments on your new deal.

If you apply for a personal loan, you’ll receive a lump sum which you then use to pay off your existing car deal. You then pay the monthly repayments on the new loan.

You can apply for a new deal online and often it only takes a few minutes to find out if you’ll be accepted.

What do I need to refinance my car?

To refinance you’ll need details of your car including its registration number and mileage. You’ll also need to provide details of your current financial deal including your monthly repayments, the amount you owe on the car and the time left on your finance arrangement. You’re also likely to be asked for proof of your identity, your address, your bank details and your employment details.

How soon can I apply to refinance my car deal?

You can apply for refinance at any time, but new lenders may require you to have had your existing deal for a minimum period of time. For example, at Experian our HP car refinancing deals are only open to people who’ve had their current HP deal for at least 12 months and who have at least another 12 months left on it.

Does refinancing a car hurt your credit score?

In the short-term your credit score could be lowered. This is because a record of the new account will be added to your credit report, which will reduce the average age of your current credit. Both these things are likely to reduce your credit score.

But as long as you keep up your repayments on the deal and pay on time, your score will recover and could go on to improve.

* You’ll have to take into account any early repayment charges on your existing deal as well as any potential fees on the new agreement when working this out.