Will My Car Repayments Increase With Rise in Interest Rates?
As you are undoubtedly aware, the Bank of England has increased the official base rate for interest in the UK recently, which will impact interest rates on practically all new car finance arrangements as well as certain current contracts.
The base rate was raised by three-quarters of a percentage point to 3%, marking the eighth rate hike in eleven months, with more rises possible. However, it's worth noting that the current rate is still around half of what it was before 2008 and remains historically low.
The rate increases are intended to limit expenditure, responding to rising inflation. Similar rises are in fact happening throughout the world.
We're all keeping a close eye on our budget, though it's fair to say it's difficult to be sure about what the impact of recent events, such as interest rate hikes, will be on any borrowing, be it credit cards, mortgage or even car finance! Are we going to have to pay more for our car loans? And is it going to have an effect on the value of our cars?
Refinance Car Loan Due to High Interest Rate
Do you need to refinance a high interest car loan? You might have a variable interest rate which is going up, or maybe you just had a low credit score when you bought the car, but your credit score has since improved. If you’re looking for methods to make your monthly repayments more manageable, or merely save money while still keeping your car, you might want to consider refinancing it. It's an excellent alternative to explore if you need to minimise your car loan payments. But can you refinance your car loan?
Refinancing is an option you can choose with PCP or HP agreements. However, whilst it's something that might save you money, it’s also vital to note that doing so may have certain risks that you should know of.
Refinancing means taking out a new finance arrangement to pay off your existing car loan. Many drivers pick this choice because they might be able to find a new loan deal with cheaper interest rates and better conditions to fit their current situation.
It's possible that you'll be offered a lower interest rate or you maybe could choose a longer repayment period for your new agreement, making your monthly expenses much more manageable. If you have a PCP car finance agreement, you can also refinance your car to pay the final balloon payment and buy the vehicle.
What's vital to remember though is that before you make a decision, you must be confident that acquiring that new loan will improve your financial position overall.
The purpose of refinancing your car is to improve your finances. To ensure that this happens, your new loan must have a lower interest rate or APR, but be aware that if you choose a longer repayment period, your payments might be lower but the overall interest you pay will be more overall. Also, note that there may be fees if you terminate your current deal early, but if you can get a much better interest rate then you still might be better off. If you can afford it, consider getting a shorter payback period, or term, even if the monthly amount is more, as you will then reduce the total cost of the loan.
How To Get Out Of A High Interest Car Loan?
If you currently have a car finance deal, the jump in interest rates is unlikely to affect you. The majority of car finance arrangements are fixed rates, which means that the interest rate is agreed upon and determined at the outset, so your monthly payment will not fluctuate during the term of the contract.
However you are likely to be affected if you took out a contract on a variable rate facility. It usually takes a few weeks for vehicle lending companies to determine whether to raise their own interest rates, by how much, and when.
If you are notified that your payments/interest rates are going to increase, it’s totally understandable if you want to get out of your current loan. There are a few options available.
Refinance a Car Loan UK
If you are now considering transferring your loan to a new provider (or maybe even settling the agreement early using savings), then the first thing you need to do is contact your current loan provider and request an early settlement figure .This is the amount you'll have to pay to terminate the arrangement early and purchase the car entirely at any point. The closer you get to the end of the contract, the lower this amount will be since you will have paid more monthly repayments. Be aware also that you can usually only request early resettlement of a loan after you have made 50% of the payments.
Trade in Your Car
You can also opt for 'trading in' your car to a dealer, who will pay the settlement sum to acquire the car from the credit company, and will then resell it. You can then use negative equity loans to buy a cheaper automobile from the dealer, making a reduced monthly payment for the new car with a little more added on top to pay off the outstanding debt on the first car.
However, please note that it illegal for you to sell your car when it is subject to being collateral against a car loan - either HP or PCP. Personal loans are not usually secured, so this wouldn't apply to those. So please make sure you use a reputable dealer who will arrange repayment of the car loan to the lender - if in doubt please consult your lender to say what you are proposing to do. You don't want to be in the position where a dealer of ill-repute takes your car and then does not pay off the loan. You will have broken the law AND will still be responsible for the repayments, even though you have then lost your car. And you might even have to pay for the new loan if you exchanged for a cheaper car. These scams do exist currently, sadly!
The Bottom Line
So, are you able to refinance your car? Yes, you can choose this option at any time during your auto financing term. You must still go through the credit application procedure, and you may or may not be accepted by the lender. If not it's worth contacting your existing lender to try to negotiate a reduction in interest rate or ask to extend your loan term to lower your repayments.
If you've carefully considered this alternatives and are certain that it's the best option for you right now, prepare for your refinancing application as best you can in advance so you seek out the best deal possible. Don't make multiple applications though, as the hard credit checks done will negative impact your credit score. But you can contact lenders and get an idea of what rates and term they can offer. They will only then do a soft credit check for this.
Previously, you could only acquire a car loan and then refinance your car over the phone or in an office. Fortunately, times have changed, and it is now easier than ever to refinance your car online. There are several online lenders to select from, like us here at Carmoola, and the procedure is far faster than doing it over the phone or any other offline way. 👍