Car Refinancing: What Is It and How It Can Lower Your Monthly Payments

Refinancing your car can give you benefits like lowering your monthly payments or reducing interest costs, depending on your individual circumstances. These savings usually come from changes in APR or the term length you choose.

Think of it this way: refinancing is like getting a second chance to negotiate a better deal on a car you already drive. 

Generally, whether or not you should refinance a car depends on:

• How much your APR has improved by
• Your current loan details, settlement figure and balloon payment
• Any fees involved (which will vary by lender)
• How long do you plan on keeping the car

It also matters whether you’re on PCP or HP, as lenders assess each differently before offering you new terms. Car refinancing often delivers the most value if you started with a high APR, your credit score has improved or if you’re approaching the balloon payment on a PCP deal.

Key takeaways

• Car refinancing could reduce interest charges and monthly payments if your APR decreases or your credit score improves.
• Extending the term lowers payments but usually raises total interest, whilst shortening the term saves money overall.
• Fees like settlement and admin costs can reduce overall savings, so don’t forget to take these into consideration
• Best results come when APR drops significantly and you keep the car long enough to realise the savings.

What is car refinancing?

Car refinancing means swapping your current car loan for a new one. The main refinance benefit is cutting costs, usually through a lower APR, a shorter term, or both. In simple terms, you pay off your old car loan with a new loan that offers improved terms and better suits your current situation.

The UK consumer car finance market is huge. Over £116 billion of car finance deals were agreed in 2024. That’s not just big business; it shows just how many drivers are financing their cars. And if millions of people are doing it, it means plenty of UK drivers could save money (or stress) by checking whether their deal still stacks up.

How car refinancing saves you money

Car refinancing can save you money by securing a lower APR, shortening your loan term or both. A reduced APR directly cuts the interest charges on your remaining balance. Shorter terms could mean you pay less interest overall despite higher monthly payments. 

It’s a bit like swapping a pricey subscription for a cheaper one that does the same job.

What to check before refinancing

• Your settlement figure and what you owe your current lender.
• Any early repayment charges.
• Whether you’re mid-term or approaching a PCP balloon payment.

Refinancing a PCP balloon payment can be especially useful. Instead of finding thousands of pounds in one hit, you can spread the balloon across a new loan, keeping the car without the big lump sum.

Quick heads up: Stretching your term lowers monthly bills but could increase the total interest you pay. Always compare both the monthly cost and the total cost of interest before deciding. That way, the car refinance benefits really do work in your favour.

When refinancing makes sense

Car refinancing is most useful when your situation has improved or your deal no longer feels fair. For example:

• You have a better credit score since you took the loan
  Interest rates have fallen
• Discovering your dealer's APR was higher than average
• You’re unable to afford the PCP balloon payment
• You need lower monthly payments

Say your car loan APR was 11.55% in June 2024. If your credit score has improved since you took out a loan at a higher rate, it’s worth having a look into refinancing to unlock some savings.

Smart car refinancing tips

• Aim for at least a 2% APR reduction
• Make sure you have enough months left on your loan for savings to build
• Aim for fees under £200 - £300 in your original loan agreement, so they don’t eat up the benefit

Think of it like switching energy suppliers: the numbers have to stack up, or it’s not worth the hassle.

You also want to be realistic about your credit. If you’ve had recent payment issues, poor credit, or limited proof of income, your options may be fewer, and rates could be higher. In that case, focus on modest savings now or improving your credit before refinancing.

How to refinance a car (step-by-step)

Refinancing a car doesn’t have to be complicated. Here’s how to do it in the UK:

1. Gather your details

Collect your current APR, original and remaining term, outstanding balance, and settlement figure. Ask your lender for the exact settlement amount (usually valid for 28 days). Don’t forget to check your original agreement for early repayment fees.

2. Check your credit reports

Before applying, review your UK credit files from Experian, Equifax, and TransUnion. If you notice any errors, contact the Credit Reference Agency to amend them so they don’t drag down your rate. Many lenders offer a soft search first, letting you pre-qualify without hurting your credit score.

See how much you could borrow with Carmoola, with no impact on your credit score. 

3. Shop around for offers

You want to compare car finance lenders on:

• APR rates
• Term flexibility
• Total amount repayable
• Fees and policies on negative equity or older cars

Tip: Similar to shopping for a mobile deal or mortgage, the first offer might not always be the best.

4. Apply for car refinance

Most car refinance applications are processed within a few days (if you're applying with Carmoola, it could be faster). If you’re approved, your new lender will pay off your old loan directly. Then, the new agreement starts with your updated terms.

Try refinancing with Carmoola.

5. Going digital

Many UK lenders now offer an online refinance process. You can upload documents, sign electronically, and get confirmation by email. This could wrap things up within a week.

6. Use a refinance calculator

Plug in your settlement figure, new APR, term length, and fees. This shows your new monthly payment and the total savings over your loan, so you can decide if refinancing really works in your favour.

Car refinance costs, risks, and what to watch out for

Refinancing can save money, but you’ll need to watch out for the costs. You may face settlement interest on your existing loan, charged daily until it’s paid off. Early settlement fees might apply if you're within the initial agreement periods. Also, new lenders may charge arrangement or admin fees (sometimes in the low hundreds), which can eat into car refinance benefits.

But the biggest risk is stretching your loan term. While this lowers your monthly bills, it usually means paying more interest overall. Negative equity is another concern, as owing more than your car’s value can limit your options. And if you choose a variable-rate loan, there’s always the chance your payments will rise if interest rates increase.

Refinancing also touches your credit score. When you first apply for refinancing, many lenders perform a soft credit check, which doesn’t affect your score. However, once you proceed with a refinance offer, the lender will do a hard credit search, which may impact your score, especially if you refinance multiple times in a short period. The good news? Successfully managing your new agreement and making consistent car finance payments can build your credit profile over time.

There’s other pitfalls you’ll want to note, too. Like being “upside down” on your loan, where depreciation outpaces repayment, making refinance tricky. Extra add-ons, like GAP insurance, often add little value for older cars and just push up costs. And if you refinance too late in your term, the savings may not outweigh the fees.

How to calculate your savings and break-even point

The key to deciding if refinancing is worth it is by comparing your current loan costs with the new offer. 

1. Look at the total repayable, including APR, the remaining term, fees, and any projected car refinance benefits.
2. Work out your monthly savings by subtracting the new payment from your current one.
3. Then multiply by the number of months left to see your total savings before fees.

Here’s a quick example. Let’s say you have a £15,000 loan at 12% APR.

• If you refinance into a new 48-month loan at 9% APR, your monthly payments drop by about £22. After allowing for £200 in settlement and admin fees, you’d break even in around 9 - 10 months and end up saving just over £800 across the full term.
• If you only had 24 months left on your loan and you refinance, the monthly saving would be very similar, but because there are fewer months left, the overall saving would be smaller, which is about £300 after fees.

Not every case delivers such strong results. Smaller APR reductions can see fees swallow most of the benefit, and if you’ve got less than a year left on your loan, the savings often won’t justify the switch. Always run the numbers carefully using your settlement figure and all applicable fees.

Calculate your settlement figure by using our early settlement calculator. 

Eligibility and documents lenders check

Not every car is eligible for refinancing. Many lenders will only offer finance to vehicles under ten years old and with mileage below around 100,000. They’ll also check the loan-to-value ratio, which is usually capped at 125%. This is to make sure the loan doesn’t leave them exposed to negative equity. Some cars, such as commercial vans, heavily modified vehicles, or unusual imports, are often excluded.

Lenders also look closely at the driver. A solid credit history helps, but you don’t always need a spotless profile to qualify. What really matters is showing you can afford the repayments. That means proving a steady income through payslips or bank statements. UK residency and a valid driving licence are standard requirements, and affordability checks are carried out under FCA rules to ensure repayments won’t overstretch you.

When it comes to paperwork, most of it is stuff you already have at home. You’ll need:

• Proof of ID – this can be a full UK driving licence
• Proof of income – such as bank statements
• The V5C logbook proves you’re the registered keeper. 

If you’re self-employed? Expect to provide tax returns or an accountant’s reference. If you’ve had recent credit issues, lenders might ask for extra context, such as a short explanation letter.

It may sound like a lot, but in practice, it’s straightforward and having the documents ready speeds things up. If your application doesn’t get approved right away, it might be worth working on your credit profile and trying again later with stronger evidence.

Alternatives to refinancing

Refinancing isn’t the only way you can take control of your car finance. Sometimes it pays to chat with your current lender first. They might let you stretch your loan term to bring monthly payments down, or shorten it if you can afford more each month and want to save on interest. Some lenders even offer payment holidays or temporary restructuring if you’re going through a rough patch.

Another simple option is overpaying your car loan. Even an extra £50 a month can chip away at your balance, cut your term, and shrink the total interest you’ll pay. And that’s all without refinancing fees or going through credit checks. Just make sure your car finance agreement allows overpayments, as some lenders do add restrictions.

If your situation has changed dramatically, selling or part-exchanging your car could be a cleaner move. Clearing your finance outright means you can put any equity towards a more affordable set of wheels. Again, it’s a bit like swapping your phone at the end of a contract instead of clinging to one you’ve fallen out of love with.

And if you’re on a PCP agreement, don’t forget your voluntary termination rights under UK law. Once you’ve paid at least 50% of the total amount payable, you can hand the car back and walk away. Just watch out for excess mileage or damage charges, which may still apply.

Conclusion

Refinancing delivers solid car refinance benefits when your APR drops significantly, fees remain reasonable, and there’s enough time left in your contract. The key is comparing your current situation against new offers whilst accounting for all costs involved.

Use this simple framework to guide your decision. These steps should help you make an informed choice on car refinancing.

• Check whether the current versus the new APR differences exceed 2%.
• Get your settlement figure and any admin fees directly from your lender for accuracy.
• Then, verify that the months remaining justify the switch.
• Figure out your break-even point.
• Make sure to compare quotes from multiple lenders, including your current provider. 

Review both your credit profile and budget to decide your priority. Choose lower monthly payments if cash flow matters to you more. Alternatively, pick a shorter term if you want to minimise total interest paid. Either approach works when it matches your financial goals.

See if switching your car finance could save you money.