Should I refinance my car?

Cut your monthly finance payments or keep your vehicle at the end of a PCP contract by refinancing your car.

By BuyaCar team January 31, 2024

If you have a car on PCP finance and you're looking to reduce your current car finance monthly payments, or want to keep your car beyond the end of the contract but can't afford the optional final balloon payment to buy it, then refinancing may help.

This may involve switching from your current contract to a new PCP or Hire Purchase agreement.

A professional car retailer or lender should take care of the details, which should leave you with lower monthly payments - though these payments will vary depending on the exact finance terms you select. You can also refinance by taking out an unsecured bank loan, but you'll need a good credit score to get a reasonable interest rate.

Behind the scenes, refinancing involves settling up your current finance contract with a one-off payment. This is either done by the finance company that is arranging your new agreement or with a loan that you've taken out. You'd then need to repay this amount over a series of monthly payments.

Refinancing at the end of a PCP finance contract will enable you to keep your car, rather than handing it back, which is the default option at the end of a PCP finance deal. The monthly payments are likely to be lower than your previous arrangement, but that will depend on factors including the interest rate and length of the contract.

Refinancing in the middle of an existing finance contract can potentially enable you to lower your monthly payments. Switching to an arrangement with a lower interest rate is one way of doing this. Another is going for a longer contract. However, keep in mind that paying less per month over a longer period will usually result in a higher overall cost because you're borrowing the same amount of money over a longer time, so there's more interest to pay.

See the best PCP deals we've found

Refinancing a car loan: the good

 A lower interest rate could dramatically reduce your monthly payments
Opting for a longer contract should result in lower monthly payments
Refinancing at the end of a PCP lets you keep the car, spreading the cost of the optional final payment

Refinancing a car loan: not so good

Refinancing during your contract may not be good value overall
A longer contract usually means paying more interest in total
Refinancing at the end of a PCP means paying additional interest on the optional final payment

Refinancing at the end of a PCP agreement

If you want to keep your car at the end of a PCP finance contract, then you’ll have the option of buying it for a lump sum. But this can be a hefty amount, being as much as half - if not more - of the car's value at the start of the contract in many cases. Refinancing allows you to spread the cost.

This can be done with a bank loan. You'd receive the money and then can make payment to the finance company. The car would then be yours and you would need to repay the bank loan.

Alternatively, you can take out another car finance agreement for a set term and a new monthly payment. You'd be effectively buying it on finance again - as a second-hand model.

The major difference is that the payment could be cheaper than before because you’re only financing that remaining lump sum. If the lump sum is less than half of the car's value at the start of the original contract, or you manage to secure a lower interest rate, this should contribute towards lower monthly payments.

Most finance providers will be able to refinance your car. As with any borrowing, you should compare quotes based on the APR interest rate, which includes all charges and fees, while being aware of any other extras or discounts thrown in and the value they offer.

Refinancing your car early

You don’t need to wait until the end of a contract to refinance: it is often possible to settle your current arrangement and take out a new policy with a lower interest rate, or over a longer term, to cut your monthly costs.

This can involve you paying more in the long run, so it's important to ensure that you fully understand what you're signing up for. Refinancing is available if you're on a PCP or Hire Purchase (HP) finance contract.

Any good finance provider will be able to offer refinancing. This will involve them paying the settlement fee on your current agreement, which ends your existing contract and transfers ownership if you are using a new lender. You'll then begin payments on a new PCP or HP finance agreement secured on the car.

If this is at a lower interest rate, then your monthly payments may well be lower and if the arrangement runs for a longer period, beyond the end date of the earlier contract, then you're also likely to be paying less per month. The longer the finance term is, however, the more interest you'll pay, so the total cost of finance is likely to be higher.

What is negative equity?

Refinancing can involve negative equity finance. The value of a new car tends to fall sharply with cars typically losing value more slowly as they get older, so the monthly payments you've made (plus the initial deposit) are not likely to cover the total amount of value the car has lost in the initial stages of a finance contract.

In this common scenario, you'd owe more than the car is worth, so you're in what's known as negative equity. The situation normally resolves itself towards the end of the finance contract, but if you refinance before that point, you may need to borrow more than the current value of the car, which can affect the interest rate that's available and the number of lenders willing to offer finance.

Another option is to take out a bank loan for the value of the settlement fee. You'll then own the car and make repayments to your lender. Interest rates may be higher than with car finance because the loan is not secured on the car.

Refinancing a leasing agreement (PCH)

You can’t typically change the payments you make when you’re leasing a car, because this is a form of long-term hire, with a set monthly rental cost.

Unlike PCP or HP contracts, you will not own the car at the end of a PCH agreement (unless the lender agrees for you to buy the car). That means, the monthly payment is fixed until you return the car. Terminating a PCH agreement early is also difficult - while it may be possible to hand back the car, the monthly payments are likely to still be charged.

Refinancing a car that’s under five years old

You should be able to refinance by taking out a PCP contract if your car is less than five years old. For cars that are older than this, you're likely to need to get Hire Purchase or a bank loan.

With PCP your monthly payments should be much lower than if you took out Hire Purchase and you’ll have three options at the end. You can return the car to the lender or buy it for a lump sum (which can be refinanced again). If the car is worth more than the optional final payment at the end of the contract, it may make sense to trade it in for another vehicle.

Hire Purchase is another option and you'll end up owning the car after making all of the monthly payments, because the higher monthly payments cover the full cost of the vehicle - unlike with PCP. Borrowing the money from a bank to refinance is an alternative.

Refinancing a car that’s five years +

PCP is less common on cars that are more than four or five years old because lenders find it difficult to predict how much a car of this age is going to be worth in the future. This means that your refinancing options on older models are usually restricted to Hire Purchase or a bank loan.

Because monthly payments on older cars are usually much lower than with newer models - as the initial value of the car is likely to be lower - you should still find yourself paying less, even if you come to the end of a PCP deal and refinance to Hire Purchase.

At the end of a Hire Purchase contract, you’ll be the car’s owner with no large final payment to make, as is the case with PCP optional final payments.

What is Hire Purchase?