Can I refinance my car loan?

Life is unpredictable, and your circumstances could change a lot during the term of a car finance agreement. Refinancing can be a handy way to make your agreement more affordable, so it fits better with your budget. But, depending on what changes you make, you might end up paying more overall - so make sure you weigh it up before you dive in. 

How does refinancing work?

Car refinancing is when you end your car finance agreement early, and replace it with a new deal. You usually keep the same car, but start your new agreement with a different lender, and on different terms to the old agreement.

It can be a useful option if your circumstances have changed since you started your finance agreement, especially if you want to lower your monthly payments or change your loan term.

Can I refinance my car loan?

The first step to refinancing your car loan is finding a new deal, either with your current lender or a new one. When you apply, the process is a lot like applying for a standard car finance loan, but you’ll need to provide extra details about your car and your current finance agreement. The lender might also want to check over your car, especially if it’s an older model.

You can apply to refinance your car at any time, but some lenders will expect you to have had your current agreement for at least a year before you try to refinance.

Once you’ve signed up to a new agreement, the new lender will pay off your old loan, and you’ll start making repayments on the new deal.

Why should I refinance my car loan?

Car finance agreements can last as long as five or six years, and a lot can happen in that time. Before you know it, a finance agreement that was perfect for you a couple of years ago might not be a good fit anymore. 

Refinancing gives you a chance to change the terms of your deal, so it’s a better fit for your budget and needs. That could mean getting a longer or shorter loan term, finding a lower interest rate, or reducing your monthly repayments.

There are a few ways that refinancing could save you money.

• Credit score gone up? You might qualify for a lower interest rate. A new loan with a lower APR will not only reduce the overall cost of the finance, but could also lower your monthly repayments.
• Had a pay rise? If your income has gone up, refinancing to a deal with higher monthly repayments and a shorter term could help you clear the finance faster, and save you money on interest.
• Budget feeling stretched? You could bring down your monthly repayments by refinancing to a longer term. But remember, while this will save you money in the short term, you might end up paying more back in interest overall if you extend your loan term.

Are there any downsides to refinancing?

Like most things in life, refinancing has its positives and negatives. You’ll need to weigh up the pros and cons to decide if it’s the right option for you. The main downsides to consider are:

Fees

You might have to pay an early settlement charge for ending your current finance deal early. Check the small print to see exactly how much it might cost you to settle your existing loan before taking out a new one.

Risks of a longer term

If you refinance to a longer loan term, you’re committing to repaying the loan over more time. Hire Purchase (HP) and Personal Contract Purchase (PCP) loans are secured against the car, meaning you’re not the legal owner until the term ends, and you can’t sell, trade in or modify the car. Extending your loan term means living with these restrictions for longer.

You could end up paying more

If you switch to a loan with a longer term to reduce your monthly repayments, you could end up paying more overall, because you’ll be paying more in interest over the duration of the term.

What do I need to refinance my car?

Different lenders might ask for different things as part of a refinance application, but in most cases you’ll need to provide:

• Your car’s details, including the registration number and mileage
• Your current loan details, including your monthly payment amount, the total amount you owe, and how long is left on the agreement
• Proof of identity
• Proof of address
• Your employment details, and proof of your income
• Your bank details