Can you refinance your car loan?

Roman Danaev

1 July 2022

Yes, it is possible to refinance your car loan through PCP or HP deal, but your car has to meet several important criteria.

There may be several reasons to refinance car loans, but often, customers look for this service precisely to reduce the interest rate they pay. Does refinancing make sense for you? Let's try to understand the essence of the car finance process, find its main advantages and answer all the crucial questions — from the finance provider’s repayment term to the stages of concluding a finance agreement.

How does refinancing a car work?

When a driver buys a new or used car, it’s often the case that they are unable to cover the full cost of the vehicle outright. In such cases, the customer usually takes a loan. Depending on their individual circumstances, a UK driver may find more favourable terms by opting for a personal loan. Here the question arises: “Is it really possible to take a new loan to get rid of the original loan and become a customer of another service?” Yes, and the process is called refinancing a car loan.

As a rule, clients are required to contact a new finance company, provide certain documents under the previous contract, and wait for approval. The lender, in turn, can either pay off the debt automatically by opening new personal credit or provide refinancing to the client so that he or she can pay it off themselves.

Can you refinance a car loan?

If you are thinking about whether a refinance car finance is realistic, then the answer depends on the specifics of the chosen company. Some lenders offer refinancing through a PCP deal or a new hire purchase. In these cases, yes, the client can get a new profitable offer with a more attractive rate of interest refinancing his car.

Note that some companies can refinance your car loan only if the vehicle meets one or more criteria based on:

  • The car’s age;
  • Odometer readings;
  • Car brand and so on.

If the client has chosen a company that does not offer direct refinancing, then there is always an alternative option. For example, a driver enters into a finance contract for a personal loan and then uses this money to instantly repay the debt — in this way, the client just needs to make the final payment and then becomes the official owner of the car.

Refinance PCP

One of the more popular transaction types is PCP finance, which stands for personal contract purchase. In fact, this is a loan that allows you to pay off the debt for the car, however, you will not be the full-fledged owner of the vehicle until you make the final payment to cover the total cost.

In general, the PCP amount can be conditionally divided into three parts:

  1. An initial deposit of 10% of the car finance amount.
  2. The amount owed minus the first deposit. It’s important to note that repayments against this amount will cover the difference between the debt taken and the final payment, but they are not enough to cover the loan in full. As a rule, the loan rate is around 6-7%, but the fee may vary.
  3. The balloon payment. You only have to pay this if you want to fully own the car. If not, then you can make a new deal for another vehicle.

Refinance HP

The second most popular option is HP finance (hire purchase). It’s a little simpler to understand because HP refinancing means that the client takes out an instalment plan for the one-time purchase of the vehicle. There is no large final payment here, and the entire purchase price is divided into a deposit and several smaller loan payments. If you have chosen this method to refinance a car, then you will become the owner of the car the moment the final payment is made.

How long does it take to refinance your car loan?

Having decided to refinance your car loan, get ready and put together all the documents because client preparedness is one of the factors that can greatly affect the speed of loan approval. As a rule, refinancing confirmation takes anything from a couple to a couple of weeks.

How much does it cost to refinance my car?

When choosing a company to refinance your car, always pay attention to the annual percentage rate (APR). Secure and time-tested companies usually charge approximately 6-7%.

In addition, many reliable brands, like Carplus, offer built-in calculators on their websites for exploring the repayment period and annual percentage rate. To obtain specific information, you need to specify the amount of debt, type of vehicle, type of driver's license and some other data.

What is the repayment period for my car loan?

It depends on your financial circumstances and the details of the contract. Generally, customers can choose a repayment term of anything between 24 and 60 months.

How often can you refinance a car loan?

Usually, it doesn't matter how quickly you decide to change the lender after making the first deal — in fact; the client can do it at any time. However, many experts advise waiting 2 to 3 months from the first contract conclusion.

Should I refinance my car?

Whether you want a better deal, lower monthly payments, or full ownership of the car after the term of your current agreement, then refinancing is the way to go. Of course, it’s worth remembering the risk factors, for instance, the vehicle’s negative equity. However, this will not change the fact that refinancing will allow you to become the actual owner of the car faster and save you money.

Saving money

Even if you have already signed a car finance contract, you should pay attention to the APR of other companies. In some cases, a new deal with a better interest rate will reduce both the number of regular payments and the overall cost.

Owning a car

Buying a car on credit often does not allow you to take full ownership of the vehicle until the full amount is paid since it is also collateral. However, by taking any of the types of refinancing, you can become the actual owner earlier but continue to pay back the cost gradually.

Benefits of refinancing a car loan

Here are the crucial advantages of automobile credit refinancing:

  1. The ability to change lenders at any time to another, offering a more attractive interest rate.
  2. Making lower monthly payments for the same repayment period.
  3. Pay off the loan ahead of time or choose a shorter term when concluding a new contract (less term, lower interest rate).
  4. Getting cash from the equity to use it to repay the credit and even pay for other expenses.

How to refinance your car loan

If you are seriously thinking about refinancing a car, then our guide will help you figure it out faster.

1. See if refinancing is right for you

The first and most important step is to understand how expedient it is to engage in refinancing. Compare the credit requirements of the current company to those of the potential lender, and check if there is an early repayment fee and an additional fee for opening a new contract.

2. Check your credit

Secondly, analyse your credit reports (on your own or with the help of third-party services for greater efficiency). Check your credit score to assess your chances of getting a good contract.

3. Get the car loan application documents together

Prepare a package of all necessary documents. It will include a copy of your driver's license, insurance, proof of income and place of residence, vehicle registration, and a 10-day payout report.

4. Compare offers

Don’t pay attention only to the first offer that comes your way — compare as many options as possible to find a reliable lender. Consider all the necessary parameters: interest rate, repayment terms and conditions.

5. Take out a new car loan

The next step is to apply to the selected company. This can be done both online and by phone or through a regular brand office.

6. Sign the contract after reviewing the terms

And finally, carefully study the terms of the contract after the approval of the application. It’s important to check the start date of payments on the new debt and the approved interest.

How does refinancing a car loan affect your credit?

As a rule, immediately after the conclusion of a new loan and the start of refinancing, your credit rating drops slightly. However, with the regular contribution of funds under the debt repayment plan, the total score is not only restored but may become higher.

Things to think about before refinancing

There are a few key factors to be aware of:

  • You will not be considered the owner of the car until the loan is repaid if you borrow against the vehicle itself;
  • If the new debt is calculated for a longer period of repayment than the first, then the total outlay may increase;
  • Remember about negative equity car finance — the price of a car usually falls over time, and there is a risk that you will pay more for the purchase than the real value.

In addition, consider the presence of additional interest in the event of a PCP deal.

Do I have to change the lender?

It depends on what you want to do. If you have found a new car finance company with more favourable terms, then you can change lenders. If you are satisfied with your previous lender but want to start refinancing, then you should contact them to discuss the details of the transaction or contact a broker.

Can I refinance my car with the same lender?

Of course! But don't take the easy route: be sure to analyse a large number of options to make sure you get the best offer with a good APR and a convenient repayment period. If your usual lender offers the most suitable conditions, then you can use its services again.

Contact our brokers

So, the details of car finance have finally been made clear! Refinancing is a great service that will allow car loan re-payers to get better terms, like a lower annual rate or a more suitable payment period. To apply, analyse the feasibility of a new loan, check credit rating and history, collect the package of necessary documents, and apply to the companies you like.

If you choose Carplus, we will quickly and efficiently consider your request and provide an instant decision on the PCP or HR loans. You will be pleased with our no-deposit deals and a favourable interest rate of 6.9% — contact our specialists now to get the most suitable refinancing option!

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