How Can I Reduce My Monthly Car Payments?

With the cost-of-living squeezing budgets across the UK, every penny counts.
If you’ve bought a car on finance, your repayment will likely be one of the biggest bills you have each month, second only to your rent or mortgage payments. Throw in the fees associated with keeping your car on the road – think fuel, insurance, road tax, and more – and the costs of car ownership can soon add up.
Finding a way to reduce your monthly repayment amount could make a big impact, especially if you’re struggling to keep up and worried you might miss a payment.
But is it even possible to reduce your repayments during your loan term? And how does it all work?
Don’t worry; we’re here to explain all.

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Can I lower my monthly repayments?

In a nutshell, yes, you might be able to lower your monthly repayments.
When you find your dream wheels and sign a finance contract to buy it, you’ll typically agree to make fixed monthly payments on the loan for two, four, or even six years.  However, a lot can change over this time like a fall in interest rates or an improvement in your credit score.
No matter whether you chose a Hire Purchase (HP) or Personal Contract Purchase (PCP) deal, these agreements are legally binding. But that doesn’t mean you have to be stuck with a loan that no longer meets your requirements
There are a whole host of options available to you; you could choose to extend your loan, refinance to a better deal, swap to a cheaper car, or even opt for voluntary termination.

Extending your car finance agreement

Most car finance loans let you spread the cost of a new or used car into fixed monthly repayments over a set term. This could last anywhere from one to six years, and you’ll be charged interest each month by the lender.
The shorter your loan term, the higher your monthly repayment is likely to be. However, if you can afford it, this approach could save you money in the long run as you won’t pay much interest.  
If you’re looking to reduce your monthly repayment, extending your loan term could help. You’ll likely end up paying back more in interest overall, but if your budget is really stretched and your priority is getting lower repayments, a loan extension could be the best solution for your short-term situation.
Speak with your existing lender to find out whether they’d be willing to extend your loan term. Keep in mind that, depending on the terms and conditions of your original agreement, your interest rate may also change.
If your current lender can’t help, it might be time to think about refinancing.

Refinancing your car loan

Refinancing is the term used to describe taking out a new finance deal with new terms. You’ll usually refinance with a new lender too. This new loan will be used to settle your existing finance and you’ll then continue paying back the remaining balance with a new monthly repayment schedule.

If you’re keen to reduce your monthly repayment amount but your existing finance provider can’t help, refinancing could provide access to longer loan terms provided by different lenders.

However, if you’ve also taken steps to improve your credit score since signing your original deal, refinancing could offer even more benefits.

Firstly, congratulations! Improving your credit score isn’t always easy, so if you’ve been able to make changes and give yours a boost, it could be time to reap the rewards.

With an improved credit score, you might now qualify for a lower interest rate. This means you could reduce your monthly payment amount without extending your loan term. Depending on your affordability, you could even reduce your loan term and keep your repayment amount the same to help you clear the debt faster (and save on interest).

When refinancing, keep in mind that different lenders will have different eligibility requirements and you’ll need to undergo a credit check. You might also have to pay an early termination fee when settling your existing finance.

Refinancing your HP finance

If you’ve got a HP finance deal with repayments you can no long easily afford, you could look to refinance.

The first step is to get a settlement figure from your lender. This will be the amount you need to pay to end your existing finance early – and the amount your new loan will need to cover.

Once you have this figure, it’s time to get a quote. You’ll likely need to supply some personal details and information about your car and undergo a credit check to find out if you’re eligible for a new and improved deal.

If you can find a refinance loan that better suits your current circumstances and budget, the new lender will then pay off your existing finance on your behalf and you’ll start making your new repayments to them instead.

Refinancing your PCP finance

It is possible to refinance a PCP agreement, but the process can be a little more complicated than refinancing HP thanks to the balloon payment.

The balloon payment is the lump sum that you’ll need to pay to end your PCP agreement and become the car’s legal owner. It’s usually equivalent to the amount the lender predicted your car would be worth at the end of your loan term and could be several thousand pounds.

If you can’t afford to pay this amount from your savings, you could look for a balloon refinance loan. This will entail taking out a new loan purely to spread the cost of your balloon payment, leaving you with new monthly repayments including interest.

To refinance a PCP agreement before you reach the end of your loan term, your settlement figure will also include the balloon payment. Depending on your car’s current value, you might also be impacted by negative equity.

Financing a cheaper car

Another way to reduce your monthly repayments – and cut your running costs too – could be swapping to a cheaper car. Trading in for an older used car with a smaller engine size, for example, can be cheaper to buy, more fuel efficient, and less expensive to insure.
Unfortunately, it’s not quite as simple as switching your existing finance to a new cheaper car. Every finance agreement is tailored to your individual circumstances and the car you’re financing. This means you’ll need to end your original agreement first, sell or trade-in your current car (or hand it back if you’re in a PCP deal), and then take out a new loan to buy your new car.
You might find this more difficult if you’re in negative equity. Equity is the term used to describe the value held in your car and being in negative equity means that it's worth less than the amount you need to pay to end the agreement.
In that case, you might choose to keep your existing car, pay the shortfall from your savings if you think the cheaper car will still save you money over time, or find a negative equity car finance deal. These deals roll the negative equity shortfall and the cost of your new car into one monthly repayment.

Can I overpay my car finance?

Feeling flush? If you’ve come into an unexpected windfall, received a large inheritance, or been promoted at work, you might be able to overpay your car finance.
Double-check the terms and conditions of your contract first. While all regulated agreements should let you settle early or make lump sum reductions, some may have limitations on the amount you can overpay each month or in one-go. There might also be early payment fees to consider.

What is Voluntary Termination?

If you’re finding it tough to keep up with your monthly repayments or no longer need your car, you could opt for voluntary termination.
Voluntary termination is a legal right, set out under Section 99 of the Consumer Credit Act 1974, that allows you to end your loan and hand the car back to your lender. You just need to tell the lender you want to voluntarily terminate and return the car. It is important to note you will need to pay 50% of the total amount payable (which includes all the interest, and the balloon payment in a PCP). If you’ve made some payments but not yet reached this point, you will need to pay the difference and if you’ve already paid 50%, you can return the car without needing to pay any more money. Charges can also apply if you’ve run over your mileage limit or damaged the car beyond fair wear and tear. 

While exercising your right to voluntary termination shouldn’t impact your credit score, it will be listed on your credit report and visible to potential lenders. Unfortunately, ending an agreement early can be more expensive for the lender, so if they see you’ve chosen voluntary termination in the past, they might be more reluctant to offer you a loan in the future.

FAQs About Reducing Monthly Payments

What are the conditions for voluntary termination of a car?

There are a few terms and conditions to keep in mind if you’re considering voluntary termination:
  • You will need to pay 50% of the total amount payable. If you’ve already made some payments, you will only need to pay the difference and if you’ve already paid over 50%, you can return the car without needing to pay any more money.
  • You might face extra charges for any damage beyond fair wear and tear
  • You may be charged more for any miles you’ve gone over your agreed annual limit (only applicable to PCP finance)
  • Your right to terminate might be lost if your loan is already in default
  • Termination rights can also be withdrawn if an accelerated payment clause has been activated and the full balance is now owed (usually after a default notice has already expired)
  • Your request may also be rejected if the car is severely damaged

Will refinancing harm my credit score?

Refinancing may harm your credit score in the short-term. This is because your new finance will be listed as a new account on your credit report, adding a hard search query and reducing the average of your credit.
Don’t worry; this should only be temporary. Once you start making your new loan repayments, your score will start to recover. In fact, if your new loan has more affordable repayments – and prevents you from missing payments – refinancing might even improve your credit score over time.

How soon can I refinance my car?

If you’re looking to reduce your monthly repayments as soon as possible, you can apply to refinance your car at any time.
However, it’s worth keeping in mind that some lenders require that you’ve had your current loan for a set period (usually at least 12 months) before you try to refinance.

How many times can I refinance my car?

While there’s technically no limit to the number of times you can refinance your car, there are a few factors that you might want to keep in mind.
Each time a new lender runs a hard credit check against your credit file, it will leave a mark on your report. This can be viewed by other lenders and having too many hard credit checks in a short period could harm your credit score.
Refinancing also means ending your existing loan early, which usually comes with early termination charges. Paying these charges more than once could start to eat into the savings you make through refinancing.