Refinancing a loan for a car

Paying for a car with a loan? You don’t have to stick with the same contract terms. Here’s our guide to how to refinance your car loan

Matt Rigby
Jul 9, 2021

In many ways, paying for a car through a personal loan is a very flexible way to get the use of your own vehicle, as it gives you a lot of control. This is because, with an unsecured personal loan, you own the car outright from the start, which is not the case with Hire Purchase or PCP finance.

You only take ownership of a car on Hire Purchase once the final monthly payment has been made, while with PCP you have to make all the monthly payments plus the large optional final payment before you become the owner. As a result, opt for a loan instead and you have a little more control over what you do with the debt.

One of your options could be to refinance. In short, replace your current loan with a new one, normally via a different lender. You might want to do this if you need to change the terms of your loan - to get lower monthly payments over a longer period for example - or if you reckon you can find a better deal with a lower interest rate via a new lender.

To be eligible, you’ll normally need to have a good credit history (just as when you took out the original loan) and be up to date with your payments. Read on for more information on why you might consider refinancing and how to do so.

Pros of refinancing a car loan

Essentially, the main reason you might want to refinance your car loan is simple: it could save you money. If you can find a new loan with a lower rate of interest, this could result in lower monthly payments or a lower overall cost. Or, often, both.

Another reason to refinance your car loan is that you can adjust the original terms of the loan. For example, you might have paid off another debt, got a promotion at work or come into some money in another way that means you have a little more disposable monthly income. In a situation like that, you might find that refinancing via a new loan with a shorter term but with higher monthly payments could actually cost you less overall - with less interest to pay, since you're paying off the balance quicker.

Alternatively, you might find yourself in the opposite position: with less monthly disposable income. In that case, you may want to refinance with a loan spread over a longer repayment term. This could end up costing you more overall, since you're borrowing the money for longer, but if it means lower monthly payments that are more manageable for you on a day-to-day basis, then it could well be worth doing.

Cons of refinancing a car loan

When considering refinancing for a car loan, it’s important to check the overall costs carefully - you might end up with a lower monthly payment, for example, but at the cost of higher interest payments overall during the term of the new loan. If you're looking to reduce the overall amount you have to pay, therefore, this may not be the answer.

You should also check for any early repayment penalties or fees associated with your current loan. There may not be any but, if there are, the cost of them could outweigh any savings you might make by refinancing the debt. So, it's important to know exactly how the potential new costs and savings balance out.

Applying to refinance a car loan - like applying for any credit - means a new lender will make what’s called a ‘hard search’ on your credit report to assess your financial suitability. This can temporarily make a dent in your credit score, but it will tend to rebound relatively quickly - especially if you continue to make any credit repayments on time.

Plus, you can shop around for multiple applications, as credit score companies will tend to roll multiple applications into one, provided you make the various applications over a short period of time. It's worth being aware that if you're just browsing and you make lots of hard credit checks in the process, this can negatively affect your credit score, as it makes it look like you're desperate for money.

If you're looking to get a large number of quotes, therefore, it's a good idea to make sure that you only submit 'soft credit searches', as these won't affect your credit score in the same way, but will give you an indication of your likelihood of being approved for a loan. Once you have the quotes back, you can see which looks like it gives you the best value and then make one application and one hard check for this.

When you should consider refinancing a car loan?

In general, it’s best to consider refinancing a car loan only if your credit score is better than it was when you first took out the loan, as this makes it much more likely that you’ll be accepted by a new lender at a lower rate of interest. Alternatively, if lower-interest loans have become available since you took out your current one, it may also be possible to get a new loan that is cheaper by a large enough margin to warrant refinancing.


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