How to refinance your car loan

What does ‘refinancing’ mean?

Refinancing is the process of financing something again, usually with a lower rate of interest.

You might choose to refinance your car loan if there’s the opportunity to get a better interest rate and replace your old loan with a new one.

You can choose to refinance your car loan with another provider that offers secured Personal Contract Purchase (PCP) or Hire Purchase (HP) finance, or get an unsecured personal loan to cover the payments.

Can you refinance a car?

If you currently have a secured PCP or HP loan, you can refinance your car with a new lender and your car will be used as collateral.

This means the lender has security knowing it can take back your car if you stop paying for your finance, depending on the circumstances.

Alternatively, you can apply for an unsecured personal loan and use this to pay off your outstanding car finance.

Can I refinance my car? Benefits of refinancing a car loan

If you’ve taken out a PCP or HP car loan, you’ll have agreed to your monthly payments at the start of your contract.

It might be the case that your situation has changed and the interest you’re currently paying is taking you over budget – refinancing your loan, however, might help you get a lower rate.

You might also find that your credit score has improved since you initially took out the car loan, and you might now get offers with better interest rates.

There are some things to consider when considering car refinancing, but there are benefits too:

• Lower monthly payments: if you refinance your car with better interest rates or a longer loan period, you could end up paying lower monthly payments. This is ideal if you need to free up some extra cash.

• Shorter repayment term: if you don’t mind your monthly payments taking a potential increase, you can also choose to pay off your loan earlier by refinancing on a shorter term. This might mean you’ll pay less interest, but your monthly payments will likely be higher. You can also choose to overpay your car loan at any time if you don’t want to completely refinance.

• Own the car quicker: with PCP and HP finance, you don’t legally own the car until you have paid the final payment. Some motorists choose to refinance with an unsecured personal loan, which will mean they legally own the car once the funds have been transferred to their current car finance provider.

Potential disadvantages around car refinancing

• Economic climate changes: It’s worth noting that, as of 2023, interest rates have been rising and this means you might not find a better car loan by refinancing. Make sure you check these interest rates before you go ahead.

• Settlement payments: There might also be early settlement compensation payments to consider when paying off car finance early, which could amount to up to two months' worth of interest. Lenders must follow the Consumer Credit Act (CCA) when it comes to these fees, so you won’t be charged anything unexpected.

• More interest overall: If your new loan period is longer than your current one, you might end up paying more interest over the full length of your contract. Consider whether lower monthly payments weigh up against more payments overall.

How does car refinancing work?

If you’ve weighed up the pros and cons and decided to go ahead, you can start the process of refinancing your car loan.

You might want to check your credit score ahead of time to see how likely it is you’ll be approved for refinancing.

The process of refinancing will be different depending on whether you’re choosing a secured PCP or HP finance option, or an unsecured personal loan.

Refinancing PCP or HP car loans

1. Make sure you compare offers before choosing a new lender to ensure you’re getting the best deal. Consider things like the repayment terms, any fees and the interest rate before going ahead.

2. Next, you’ll need to submit your application to the new lender and provide some documents. These can include a copy of your driver’s licence, vehicle registration, proof of income, and proof of address.

3. Once you’ve been approved for a new loan, you should take some time to read the documents and sign your agreement. Make sure you check the fine print and understand what you’re agreeing to.

4. Once you’ve signed all the paperwork, your new lender will pay off your loan with the old lender and will get in touch with you when it's time to start paying for your new loan.

What happens if I refinance my car and don’t make the payments?

If you choose to refinance your car, it’s important to keep on top of your payments. The implications of not paying your car finance loan will depend on how far along you are into your agreement and the type of loan you have.

• What happens if I don't pay my car finance?

Under the Consumer Credit Act, a lender can’t repossess a vehicle where you have paid more than a third of the total amount payable, unless they get a court order.

If you’ve already passed this point with your current lender, you’ll need to bear in mind that you'll be starting a new agreement and will lose this protection until you've paid a third of your new agreement.

You also have a right to voluntarily terminate the agreement once you have paid 50% of the total amount payable.

This means you can let your lender know that you want to terminate the agreement, hand back the car, and have nothing left to pay.

If you start a new agreement, you’ll no longer be able to do this until you have paid 50%.

If you can't make the repayments on your new agreement, you should always contact your lender as soon as possible as they will always try and work with you to find a solution.

Just ensure you're fully aware of any protections you will lose under your current agreement.

Does car refinancing affect your credit rating?

Whenever you apply for a type of finance, your credit score is likely to take an initial hit and may drop. As you start to pay back your loan, this can actually help you improve your credit score.

Any type of on-time finance repayment can help build a positive credit history, so you’ll still be doing this if you’re paying your current finance on time without refinancing.

You might find that your credit score drops after you’ve applied to refinance a car loan, but it’s likely your credit score will build back up if you keep on top of your payments.

Learn more about car finance:

• Can you get car finance with bad credit?

• What checks are done for car finance?