Should you refinance your car?
Considering refinancing your car this year? Whether your circumstances have changed or you’ve simply found a deal that suits you better, refinancing your car could be a smart move.
Car refinancing is when you apply for a new car loan (usually with a new lender) and use this to pay off your existing car finance loan. You’ll then start making monthly payments on the new car finance deal.
Refinancing could help you lower your monthly payments, reduce your interest rate, or find terms that better match your needs. But, it might not always be the right move, there could be fees involved and extending the loan term can increase the total amount of interest payable. To help you make an informed decision, we’ve detailed everything you might need to know.
When should I refinance my car?
There are a few different scenarios where it might be beneficial to refinance your car. For many people, it’s because the deal that was right for them at the time simply isn’t anymore. Car finance loans can take years to pay off, and people’s circumstances change.
So, when is the best time to refinance a car? Everyone’s situation is different, but here are some times you might consider it:
When your credit score improves
You may want to refinance your car because you’ve improved your credit score since you took out your existing loan, and you’re wondering if you could be eligible for a new deal with lower interest rates. In this case, refinancing your old deal and paying off less interest on your new one could help you reduce the amount of interest you pay going forward.
When interest rates drop
If market interest rates are lower than when you first got your car finance deal, refinancing could mean switching to one with a better rate. Even a small drop could make a difference to your monthly repayments and the total loan cost over time. However, try and look beyond APRs and factor in settlement figures, early-repayment charges, and any new arrangement fees to see if you would genuinely save money, and extending your loan term can increase the total amount of interest payable.
If you can’t afford your payments
Another reason could be that your financial circumstances have changed now, and you can’t afford the same payments. If you're struggling to make your monthly repayments and need a bit of extra cash month to month, you could speak to your current lender as they may offer temporary support. Refinancing can lower monthly payments, but often extending the term can increase the total interest you repay.
If you have equity on the car
If the value of your car is higher than the amount you still owe, you have positive equity. Refinancing in this situation could allow you to use that equity to lower your new loan amount, and reduce your monthly repayments, or free up the cash to use it for something else. Taking out a new loan does mean you will continue to pay interest, which can mean you end up paying more overall.
If you want to cover a balloon payment
You may also want a loan to cover your PCP balloon payment. If you’re at the end of a PCP car finance deal, you’ll need to pay what’s known as a balloon payment to keep the car. This is a lump sum that covers the value of your car and can be expensive to pay off in one go.
Refinancing could give you the option of paying this off in monthly installments. But it’s important to remember you’ll also have to pay interest on a new loan, which could mean you end up paying more overall.
If you want solo ownership
Refinancing could also be an option if you initially shared a car finance deal with someone (say an ex-partner) and now you want one in your name only. In this instance, refinancing your car would allow you to get a new deal in your name only.
When shouldn’t you refinance your car?
Knowing when to refinance car loans is important, but it’s also important to understand when it might not be beneficial. There can be advantages to refinancing a car, but there are also a few things you may want to consider to make sure it’s the best option for you.
If you’re nearing the end of your loan term
If you’re close to finishing your current agreement, refinancing might not make much sense. By the time you’ve gone through the process and factored in any fees, you may only have a few payments left to make, and there might not be any benefit in starting a brand new loan.
High refinancing costs
Before you refinance your car deal, it could be a good idea to check if there’s an early repayment fee or any refinancing costs on your existing car finance deal. This isn’t the case for all lenders, but it’s worth checking if it applies to you and factoring this into your calculations.
If rates haven’t changed since you applied
One of the biggest reasons people consider refinancing is to take advantage of lower interest rates. But if rates haven’t fallen since you first took out your agreement, you may be unlikely to save money by switching to a new deal. Even with the same APR, extending the term can raise the total cost.
If your credit score has declined
If your credit score has gone down since you applied for your current loan, refinancing could leave you worse off than you are now. Lenders may offer you higher interest rates or less favourable terms, which could make it expensive than sticking with the deal you have.
If the vehicle is very old
Older cars tend to lose value and could therefore be harder to refinance. Lenders sometimes have age and mileage limits in place, so if your car is very old, you may struggle to find a new deal that works for you.
Negative equity
If you’re in negative equity on your car, you might find it harder to refinance it. Negative equity is when your car has depreciated in value, and you owe more on your loan than the car is now worth. If this happens, lenders may be less likely to offer you a loan.
If this is your situation, try not to worry. At Car Finance 247, we work with a trusted panel of lenders, some of which could offer negative equity car finance, helping you find a deal that you’re happy with.
How soon after can you refinance your car?
You might be thinking about refinancing soon after starting your current agreement, especially if your circumstances have changed or you’ve seen a better deal. So, when can you refinance a car loan?
In most cases, you’re able to apply fairly quickly, but there are a few factors that could affect whether it’s the right time. Some lenders may have minimum waiting periods before you can apply again, so it’s worth checking the terms of your current deal.
And it could also be a good idea to think about your credit score. If you decide to go ahead with a car finance quote, you will receive a hard search which leaves a mark on your credit file, so applying too soon after your first loan could make you look higher risk to lenders.
How to refinance a car loan
So how does refinancing a car work exactly?
To refinance a car loan you may need to provide your new lender some details about yourself and your current car deal. These could include:
- Details of your car, including its current mileage and vehicle registration number
- Details of your current car finance deal, including your settlement figure and the time left on your agreement
- Personal ID, and proof of your address
But to begin the process, you can get a no-obligation quote. If you’re approved in principle at this stage, one of our friendly account managers will give you a call to discuss your options and try to find a new deal for you.
Does refinancing a car hurt your credit score?
Like any loan, refinancing your car could impact your credit score initially. But if you keep on top of your monthly payments, your score may even improve.
If you’re going through other important credit checks, you may prefer to hold off refinancing until afterwards, to help avoid any short-term effect on your credit score impacting this.
At Car Finance 247, we only do a soft credit check for car finance first, which doesn’t impact your credit score. If you are approved in principle and decide to proceed, we’ll carry out a hard credit search, which may impact your credit score.
If you do decide you want to refinance, you may want to improve your credit score as much as possible first to help boost your chances of approval and get you the right deal for your circumstances.
The takeaway
For many people, refinancing a car can be a great way to get a more suitable deal for their circumstances than they currently have.
Whether interest rates have dropped, you have improved your credit score since your last deal, you want to reduce your monthly payments or spread the cost of a balloon payment, refinancing your car could be a good option. It’s important to bear in mind that spreading your outstanding loan over a longer term can reduce the monthly payment but may increase the total amount of interest payable.
To make the best decision for you, remember to factor in interest rates when you make your calculations and check for repayment fees on your current loan.
Got any questions? Get in touch and we’ll talk you through how to refinance a car loan in more detail and help you get the right deal for you. And for more helpful tips, check out our other guides.