Can you refinance a car on finance?
We explain the growing trend for refinancing during a cost of living crisis
If you have a car on finance and could do with a helping hand to pay off the outstanding amount, then are you aware that you can refinance the vehicle? Whether you wish to spread the cost of a final payment, secure a better interest rate or reduce your monthly payments, then refinancing your loan could be a preferable option.
In this article dedicated to the topic of refinancing, we explain how taking out a new finance agreement on your existing car loan may be just the solution you need during a cost of living crisis. Read on to find out more…
What is car refinancing?
When you refinance a car, it means that you are taking out a new finance agreement - usually to pay off the existing amount of money owed to the lender. Refinancing a car comes with its own set of terms that replace those in the previous agreement.
Who can refinance a car?
If you currently have a car on finance and are looking to manage your money more effectively, then you may want to consider refinancing the vehicle. Much like when you first applied for car finance, a lender will check your eligibility for refinance.
Remember that your credit history will be looked into on a case by case basis. This means a lender will take into consideration your current credit score, that you’ve met all your existing finance repayments, and that you’re not in a huge amount of debt.
If you have struggled to meet the repayments on your existing finance deal, then it is likely that your application to refinance the outstanding amount on your car will be declined. If you are unsure, it is worth seeking financial advice before you submit a finance application.
How does refinancing a car work?
Effectively, all a refinance car loan does is replace the agreement you have in place with your existing lender. Most vehicle finance deals last for three years, so in that time, it may be that you could benefit from a lower interest rate or make your monthly repayments more affordable.
Whatever your reasons for wanting to refinance your car, the principle is exactly the same as the initial agreement you entered into - be it a Personal Contract Purchase (PCP), Hire Purchase (HP) or Lease Purchase (LP) deal.
Before you go ahead and apply, it’s best to speak with an experienced vehicle finance broker like ourselves. We will help you understand your options and the likelihood of being approved for car refinance.
How soon into your contract can you refinance a car?
There’s not usually anything stopping you from refinancing your car at any given point during your contract, but then that’s not necessarily the best thing to do. Generally, it’s recommended that you wait at least one year before you make a refinance application.
It’s also worth checking the terms and conditions laid out in your current finance contract, as the lender's policy may stipulate that you would need to wait up to three months before you can apply to refinance the vehicle.
Remember - to be in the best position to be approved for car refinance, you’ll want to ensure you have a healthy credit score. This is why by waiting at least 12 months to apply for refinance, it is likely your credit score will have gone up since the agreement with your existing lender started.
But - don’t leave it too late into your contract to apply for refinance either, otherwise you won’t reap the rewards!
The pros and cons of refinancing a car
As with any financial decision you make in life, there are both pros and cons to consider. So that you can make a more informed decision about whether refinancing a car is the right choice for you, we’ve listed the main advantages and disadvantages:
Car Refinance ADVANTAGES | Car Refinance DISADVANTAGES |
|---|---|
You may secure a lower interest rate compared to your current loan agreement | Your credit score could dip a few points initially |
You can pay off your loan quicker | You are essentially rolling over your existing debt onto a new lender |
An opportunity to change your existing loan agreement terms | You may end up paying more over a longer period of time depending on the agreed new terms |
Your monthly payment amount may decrease | Your monthly payments may increase |
You could negotiate terms to help make your monthly outgoings more manageable | You may be subject to an early repayment fee on your former loan |
What are the overall benefits of refinancing a car?
One of the main advantages to refinancing your car is an improved interest rate. With this in mind, applying to refinance a vehicle is only worth doing if you can reduce your current interest rate by at least 1%. But we’d suggest that 2% is more likely to benefit you long term.
As well as the advantages we’ve listed in the table above, refinancing your car could mean you take ownership of the vehicle much sooner than on your current contract (depending on the type of loan you apply for) - allow us to explain:
On an existing Personal Contract Purchase (PCP) or Hire Purchase (HP) deal, it is the finance company that is the registered owner of the vehicle until you’ve paid off the outstanding amount. But, when you refinance a car by opting for a personal or business bank loan instead of an authorised lender, you technically become the car’s registered owner, as you’ll owe money back to the bank, rather than a lender.
However - if you choose to opt for a bank loan to refinance your car, this is considered to be what’s called an ‘unsecured’ loan. This means you will lose some of the consumer protection benefits that come with choosing to refinance your car with an authorised lender.
Under what circumstances should you refinance a car?
So, you’ve decided you want to refinance your car; you’ve kept up with all your repayments so far and your current credit score is looking good - but when is the best time to apply for a refinance loan?
When you should proceed with a car refinance application is just as important as making the choice to do so. To help, ask yourself these three questions and make sure the answer is ‘yes’ to ensure that refinancing is the best option for you:
1 - Has your credit score improved?
The higher your credit score, the more favourable the refinance loan will be. If your current credit score is better than it was when you first applied for finance, you could unlock some even better deals.
2 - Have interest rates dropped?
There’s absolutely no point in refinancing your car if interest rates are higher than they previously were. To maximise the benefits of a refinance loan, current interest rates should be at least 1-2% lower than when you first applied for finance.
3 - Are you still in the early stages of the loan?
You’ll be able to make the most of a car refinance loan the earlier you are into your current contract. The optimum time to refinance is around a year into your current agreement, but this can be done from as little as 3-6 months into the term. Most car finance deals are fixed for three years, so don’t leave it too late, otherwise you won’t see the benefits.
Car refinance deals at your fingertips
As a leading UK broker operating in vehicle finance, here at Octane Finance we are best-placed to help you secure the funding you need to refinance your car. Through our extensive panel of lenders, we can source the ideal solution when it comes to your refinancing request.
Simply get in touch to speak with one of our experienced finance specialists and find out what options are available to you. We will always do our best to source a preferable lender at the best rate possible, which is why we are rated as ‘Excellent’ on Trustpilot with over 1,000 verified reviews. Take a look for yourself and give us a call today.