Can you refinance a car loan?

Refinancing a car loan means you take out a new credit agreement and use it to repay your current car finance debt. You might do this to reduce your monthly payments, but find out more to see if it’s the right decision for you.

Rhiannon Philps Published on 14 July 2021. Last updated on 15 July 2021.
Can you refinance a car loan?

When you take out car finance over a period of several years, a lot of things can change in that time. You might improve your credit score, get a salary increase or find yourself on a lower income and needing to cut back on expenses.

Whatever the circumstances, you might find that your existing car finance agreement isn’t right for you.

If that’s the case, you could consider refinancing your car loan to an agreement that is a better fit for your current situation.

What does refinancing a loan mean?

Refinancing a loan simply means that you take out a new loan to pay off existing debt. You essentially move your debt to a new agreement, just like when you remortgage.

Depending on how you refinance and which provider you choose, the new lender may settle your existing debt for you or you may have to pay it off yourself when you receive the money from your new loan.

» MORE: How to refinance a personal loan

Can you refinance a car loan?

Yes, you can refinance a car loan, whether you have hire purchase, personal contract purchase, or used a personal loan to buy a car.

If your car is currently on a car finance agreement, you may be able to find a provider that will refinance this with a new hire purchase or PCP deal.

Bear in mind that not every lender is able to refinance, and some may only refinance vehicles that meet their requirements for age and mileage for example.

Alternatively, instead of refinancing to a new car finance deal, you may choose to refinance by taking out a personal loan and then paying off your existing car finance.

Taking out a loan to pay the final balloon payment of a personal contract purchase (PCP) agreement is also referred to as refinancing.

To own the car at the end of a PCP deal you need to pay a balloon payment, but this is normally a sizeable sum and much larger than the standard monthly repayments so some people may not have sufficient savings to comfortably afford this payment in one instalment. In this case, they may take out a loan to settle their finance and become the legal owner of the car.

If your car is in negative equity, some providers may not want to refinance your car loan, or may offer you a higher rate of interest. You may still be able to take out a personal loan to pay off the finance and keep the car, but you should consider whether an alternative option might be more suitable, such as returning your car (if possible).

» MORE: Calculate loan costs

Should I refinance my car loan?

It may make sense to refinance your car loan if you have a good credit score and can access better interest rates than on your current deal, but it will depend on your individual situation.

For example, you might consider refinancing if:

  • You want to own the car outright and it’s currently on finance. Rather than waiting until the end of the contract for ownership to transfer to you, you might want to move from a car finance agreement where the lender owns the car to an unsecured personal loan so you legally own the car sooner.
  • You can’t afford to pay the balloon payment on your PCP agreement but you want to own the car. However, because you would pay interest on the loan, you would end up paying more overall than if you paid the balloon payment with your own money.
  • You can get a better interest rate. If your credit score is better than when you first applied for finance, you might be able to refinance to a deal with a more competitive rate of interest and reduce how much you repay overall. However, you will need to take into account any early repayment fees and other charges that could minimise the benefits of a lower interest rate.
  • You are struggling to repay your loan and you want to reduce your monthly payments. You may be able to refinance to a new loan with a longer term so your monthly payments are smaller and more manageable. But extending the term will also mean you end up paying more interest and repaying more overall.

Whatever your situation, you need to remember that refinancing a loan involves a new application for credit and a hard credit check, so your credit score may temporarily be affected. But, as long as you meet all the repayments on the new loan, you shouldn’t get penalised for refinancing as you will have repaid your existing debt in full.

You should also think twice about using a personal loan to pay off your car finance early. When you have a car on finance, you are entitled to cancel your agreement through voluntary termination and return your car to the finance company. If you have paid off your finance with a personal loan, you won’t be able to return the car if you can no longer afford the repayments.

How to refinance your car loan

Before refinancing your loan, you should check your credit score. This will help you decide whether it is the right time to refinance, or if you need to work on improving your credit score first.

You will also need to check how much you owe on your existing finance agreement. Contact your finance provider to get a settlement figure so you know how much you need to borrow with your new loan. If you refinance to a new car finance deal, you will need to pass this settlement figure on to your new finance provider for them to pay it on your behalf.

Next, you will need to find a lender. You may be able to refinance with your existing lender, but it’s worth comparing rates from other providers, whether you want to refinance with a new car finance agreement or with a personal loan. Some providers may set certain requirements so you should check you meet any of their criteria.

Once you’ve found a suitable loan or finance deal, you can then apply. You will need to include your personal and financial information in your application and, if you’re refinancing to a HP or PCP deal, you will need to provide details about your vehicle and existing finance.

If approved, the provider may settle your existing finance directly. However, if you get a personal loan, you will need to pay your existing finance off yourself.

You will then make repayments on your new finance agreement as usual until you have repaid it in full.

» COMPARE: Personal loan rates

Image source: Getty Images

About the author:

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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