Can I Refinance My Car Loan?

Car finance is a long-term commitment. Depending on the details of your deal, the shortest terms are typically around one year, but you might sign an agreement that lasts four, five, or even six years. And a lot can change in that time; a loan that was perfect for you when you first got it, might not be right for you a few years later.

That’s where refinancing comes in.

Car refinancing is the process of ending your existing finance early and replacing it with a new deal, usually with a different lender and different terms.

But what does that mean in practice? Let’s break it all down.

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How does refinancing work?

It all starts with finding a new deal. This could be with your existing loan provider or a new one. The application process works a lot like applying for a standard car finance loan, but you’ll need to provide extra details about your car and your current finance agreement. The lender might also ask to check over your vehicle, especially if it’s an older model.

Once you’ve found an agreement that works for you and signed on the dotted line, your new lender will pay to settle your existing finance on your behalf.

You’ll then start making fixed monthly repayments on the new deal.

Can I refinance my car loan at any time?

Yes, if your circumstances have changed and your existing car loan doesn’t feel like the right fit anymore, you can apply to refinance 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.

Why should I refinance my car loan?

Your car loan is likely one of your biggest monthly expenses after your mortgage or rent payment. That’s why it’s so important that it fits your budget and needs. It’s not just about having a car that gets you from A to B, it’s having one that’s affordable and appropriate for your everyday life.
Over the course of your loan term, a lot can change, for better and worse. You might lose your job, get a promotion, have another child, end a relationship, or improve your credit score. Before you know it, a finance agreement that was right for you two or three years’ ago might not be a good fit anymore.
A refinance car loan gives you the chance to change the term of your deal. This could mean:

  • Putting a joint agreement into your name only
  • Switching from HP or PCP finance to a personal loan
  • Getting a longer or shorter loan term
  • Finding a lower interest rate

How can refinancing save me money?

Everyone loves having a few extra pounds in their pocket, and while it’s not guaranteed that you’ll find a better deal, refinancing could save you money.

If you’ve put in the work to improve your credit score over time, you might find that you now qualify for a lower interest rate. A loan with a lower APR will not only reduce the overall cost of the finance but could also lower your monthly repayment amount.

In contrast, if you’ve had a promotion or a pay rise since you took out your loan, you might be able to put more towards your loan each month. Refinancing to a deal with higher monthly repayments but a shorter loan term could help you clear the finance faster and save money on interest.

On the other hand, if your budget is stretched and you’re struggling to keep up with your monthly repayments, you might be able to reduce your repayment amount by refinancing to a longer loan term. The more months the loan is spread across, the lower your monthly payment will be. Keep in mind that, while you’ll save in the short, you might end up paying more back in interest overall.

What do I need to refinance my car?

While different lenders can ask for different things as part of a refinance application, in most cases, you’ll need to have ready:

  • Your car’s details including its registration number and mileage
  • Your current loan details including monthly payment amount, the total amount owed, and the time left on the agreement
  • Proof of identity
  • Proof of address
  • Employment details and proof of income
  • Bank details

Will refinancing harm my credit score?

Credit scores aren’t an exact science and can be affected by a whole range of different factors, but refinancing will usually lower your 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 panic; this dip should only be temporary. Once you start making your new loan repayments, your score will start to recover. In fact, if your new deal comes with more affordable repayments – and reduces the chances that you’ll miss a payment – refinancing could even improve your credit score over time.

Are there any downsides to refinancing?

As with all things finance, there are both positives and negatives to refinancing a car loan. You’ll need to weigh up these pros and cons against your personal priorities and financial circumstances to decide if it’s the best option for you.
Potential downsides to refinancing include:

Lack of good deals

Depending on wider economic conditions, your credit score, and your affordability, it may be hard to find a deal with a more competitive interest rate.

Early termination charge

Many car finance agreements will apply a charge for ending your car finance early. Check the small print to know exactly how much settling your loan and refinancing the car could cost you.

Increased interest

If you switch to a loan with a longer term to reduce your monthly repayment amount, you could end up paying more in interest overall.

FAQs About Refinancing

Can I refinance my car if I have bad credit?

Yes, while it can be harder to find a refinancing loan if you have a bad credit score, it’s not impossible.
Whether you’ve missed payments, been in an IVA, or had a CCJ in the past, there are car finance lenders out there who specialise in helping people with poor credit scores.
But be aware that if you’ve defaulted in the past, you may not be able to secure a new deal with a more competitive interest rate.

What documents do I need to refinance a car?

Different lenders might ask you to provide different documents – especially if your refinancing request is a little more complicated than the average – but you’ll likely need to supply:

  • Proof of ID – such as your driving licence or passport
  • Proof of income – usually three months’ bank statements or payslips
  • Proof of address – including your Council Tax statement or utility bills
  • Vehicle registration
  • Insurance policy

Will my monthly payments decrease if I refinance my car?

One of the biggest reasons why you might be tempted to refinance your car is to reduce your monthly payment amount. Maybe you’ve had a change in circumstances, your expenses have gone up, or you’d just like to save a little more each month if you can.
If reduced monthly payments are your priority, you might be able to refinance with an extended loan term that spreads the cost of your finance over a longer time, although this might cost you more in interest overall.
You may also be able to lower your monthly payments if your credit score has improved since you signed your original loan agreement and you’re now eligible for a deal with a lower interest rate.

Can I refinance my car with the same lender?

Yes, while most refinancing loans involve getting a deal from a new lender, you might be able to refinance with your existing lender if they have an option that suits your current circumstances.

What happens if I refinance my car and don’t make the payments?

When it comes to missing payments, a refinance loan is no different to standard car finance: you may be at risk of having your car repossessed. Missed or late loan payments can also harm your credit score and make it more difficult for you to find finance in the future. If you’re concerned you might miss a payment, contact your lender as soon as possible and they may be able to help.