Refinancing a car

Want to keep your current car at the end of your PCP finance contract, but can't afford the optional final payment? Refinancing could help

John Evans
Sep 25, 2020

Car finance can be baffling. Should you go for PCP finance, Hire Purchase, Personal Contract Hire leasing, or maybe get a personal loan? There are pros and cons to each, but PCP finance is the most popular option for new car drivers. Part of the reason for this is because you get low monthly payments and another factor is that at the end of the contract you have three options.

Firstly you can hand the car back and walk away with nothing more to pay (assuming you've stayed below the pre-agreed mileage limit and kept the car in good condition), secondly you could 'part-exchange' it for another car on finance, putting any 'equity' (should it be worth more than the optional final payment) towards the deposit on your next car or thirdly you could make the optional final payment to buy the car.

Amid the economic uncertainty arising from the coronavirus epidemic, this last option - which sees you own the car outright - is tempting for many drivers. For one thing, this helps you to avoid tying yourself into a long contract on a brand new replacement car that is likely to be more expensive. You also get to keep a car that you have been driving for several years. If it has served you well, it's likely you trust it more than another used car of the same age. And, if you've looked after it, it might even look as good as the day you got it.

There’s one other benefit, too. Life has a habit of changing and while at the outset of the PCP contract you may have estimated your annual mileage - potentially even adding a little extra just in case - by the time the contract comes to an end, you may have covered many more miles.

If you’re planning to hand the car back to the finance company, this difference will be charged on a pence-per-mile basis and that could cost you dearly - bills of thousands of pounds aren't unheard of, should the driver chalk up tens of thousands of miles more than agreed. However, if you make the optional final payment to buy the car, the finance company won't charge you anything - since doing this makes you the owner of the car.

However, there’s one small but crucial problem - finding the money to make that optional final payment, as this can often amount to half of the car's cash price at the start of the contract - even more in some cases. Fortunately, finance can help to address this problem once more, in the form of 'refinancing'.

What is refinancing?

Refinancing refers to a driver using a new finance deal to pay off the final payment on the original finance contract. This involves taking out a new finance contract - be it Hire Purchase or a personal loan - and covering the cost of this optional final payment with another series of monthly payments.

Each has its pros and cons. So keep reading to find out which format works best for you.

Refinancing using Hire Purchase

This is probably the easiest way to refinance your car at the end of a PCP deal and can often be arranged by the same finance company that organised the original PCP contract.

So, once you're at the end of the original PCP term, rather than have to make the large lump sum payment, you can refinance this figure with Hire Purchase, splitting this into a series of far more affordable monthly payments. You may be able to put down only a small deposit or potentially no deposit at all. Remember, though, that the lower the deposit is, the higher your monthly payments will be and the more interest you'll pay overall.

Your monthly payments are likely to remain broadly the same in going from a three-year PCP on a brand new car to refinancing the optional final payment using a three-year Hire Purchase deal. That's because monthly payments on a typical PCP contract cover around half of the car's original price - the difference between the car's cash price and what it's predicted to be worth after three years.

Refinance the three-year old car with a three-year Hire Purchase contract and you're financing the full cost of the three-year old car - which is likely to be around half of the original price - over the same number of monthly payments. This means that if you can afford your current PCP finance monthly payments you should be able to afford to switch to a Hire Purchase deal to cover the optional final payment and buy the car outright.

As always with finance, your exact monthly payments will depend upon the exact cash price - in this case the optional final payment - the deposit you put down, the length of the contract and the specific interest rate charged.

Another attraction of Hire Purchase lies in the fact that you're repaying the full cost of the car - at the end it's yours to keep. There are no further optional final payments or excess mileage charges to worry about. You can sell the car privately at the end of the contract - since you own it - part-exchange it or simply keep it for another few years with nothing more to pay.

Refinancing using a personal loan

Unlike Hire Purchase, the finance company that arranged your original PCP is unlikely to offer you a personal loan, so if you want one to pay off the optional final payment at the end of the PCP deal, you'll need to track one down. It shouldn’t be too difficult, but the value of the deals available to you depends very much upon your credit score.

Also bear in mind that using a personal loan to finance a car purchase ties up borrowing capacity - the amount you're able to borrow overall - that you might want to leave spare for other things, such as a mortgage.

Also, because the loan is unsecured - that means it’s not tied to the car - the lender may charge you a higher interest rate than you’d pay using Hire Purchase to give them extra security.

As with Hire Purchase, with a loan you’re making monthly payments that will eventually pay off the entire value of the car. Unlike Hire Purchase, however, you own the car from day one with a loan. Remember that just as this means you're free to sell the car whenever you want with a loan, the finance company can seek to repossess other belongings of yours if you fail to make payments, while Hire Purchase is specifically secured on the car, meaning that it'd be the car that is repossessed if you fall drastically behind with payments.

Advantages of refinancing

  • The car is yours at the end of the refinancing term, with nothing left to pay
  • Hire Purchase can be easy to organise through your original PCP provider
  • If a deposit is required, it’s likely to be small
  • Monthly payments may be lower than before, depending on the car
  • Refinancing enables you to keep the car, a vehicle you know and trust
  • No excess mileage charges will be issued, as you're not returning the car
  • Refinancing is likely to cost you less than financing a brand new equivalent


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