Should You Refinance Your Car? Cut Loan Costs & Save Money

If you’re feeling like your car‑finance deal isn’t working for you anymore — maybe payments have crept up, your credit score has improved, or you’re just paying too much interest — refinancing might be an option. But it isn’t always the right move. Here’s how to decide when refinancing makes sense in the UK, and how to do it smartly.

📌 What Does Refinancing a Car Deal Mean?

In simple terms: you replace your existing car‑finance agreement (PCP, HP or other) with a new one—ideally on better terms. That might mean:

Lower monthly payments
A shorter remaining term
Paying a better interest rate
Switching product type (e.g., from PCP to HP). But it also involves checking fees, your current deal’s settlement figure, and your car’s value.

✅ Signs That Refinancing May Be Worth Considering

Look into refinancing if:

Your interest rate is high — and market rates are lower now. If you’re paying more than you should and your credit has improved.
You’ve improved your credit score since you took out the deal — this may open access to better lender offers.
You’re struggling with the payments — refinancing to a longer term may lower monthly cost (though might cost more interest overall).
You need to deal with a balloon payment at end of PCP — refinancing can spread that cost.
You have equity in the vehicle (you owe less than it’s worth) — that’s helpful when switching lenders.

⚠️ When Refinancing Might Not Be a Good Idea

You’re nearing the end of your agreement anyway — a new term might cost more overall.
Your car is older and losing value quickly, making lender offers weak.
You’re in negative equity (owe more than car value) — this complicates refinancing.
You’ll incur large early repayment charges or fees.
You refinance just to extend the term and lower payments, but end up paying much more interest overall.

🧮 Early Settlement, Penalties & Settlement Figures

What Is a Settlement Figure?

If you want to clear your finance early (e.g., to refinance or sell the car), you need a settlement figure — the total amount you’d need to pay to clear the agreement. It often includes: outstanding balance + any early settlement fees + balloon (for PCP) + admin charges.

How Early Settlement & Penalties Work

You request the settlement figure from your lender. They normally provide a written quote valid for a limited time (often 14‑28 days).
Many lenders apply early settlement fees or include lost interest under Consumer Credit (Early Settlement) Regulations 2004.
Example: Your outstanding balance is £8,000, you get a settlement figure of £9,200 (due to fees plus balloon). You’d compare this with continuing your current deal, and the cost of a new refinancing offer.
Make sure the settlement figure is valid at time of payment (if you pay later, it may increase).

Why It Matters for Refinancing

If your settlement figure is high, your potential saving via refinancing shrinks. Always factor settlement costs into your comparison of new vs current deals.

📊 Timeline & Process: What to Expect

Application & decision: Some lenders can give instant decisions or within a few hours.
Documentation & verification: 1‑5 business days typical in UK context (income, vehicle details, credit check).
Pay‑off and transfer: New lender pays off the old deal; the process can take 1‑3 weeks or more depending on lender and vehicle age.
Title / finance update: In UK the update to the vehicle’s finance status can take a few additional days.
Meanwhile: continue making your original payments until the old deal is officially closed. Missing payments can affect credit.
Always compare the total cost: fees + interest + term vs maintaining your current agreement.

🔍 Dealing With Negative Equity

Negative equity occurs when you owe more on your finance than the vehicle’s current value. Here’s how it affects refinancing and what you can do:

Effect: Lenders may decline refinancing or offer higher interest if the car is worth less than the debt.
Solution A: Wait and pay down debt until equity improves (vehicle value rises or you owe less).
Solution B: Make a top‑up payment to reduce the balance before refinancing.
Solution C: Accept that refinancing may not be beneficial yet — consider keeping your current deal or switching to HP to build equity more quickly.
Negotiation: Ask your lender if you can transfer the deal or vehicle to another product – sometimes they provide flexible options.

🎯 FAQs — Extra Questions You’ll Find Useful

Q: What exactly is a settlement figure and how do I get it? A: It’s a quote from your lender showing the amount needed to pay off your finance early. Make sure your request it in writing
Q: How long after I take the car out can I refinance? A: There’s no fixed rule, but many lenders prefer you wait at least 6 months after the original deal. Very early refinancing may attract higher rates.
Q: What fees do I need to watch for when refinancing? A: Settlement figure fees, possible new establishment/admin fees, higher interest if you’re older vehicle or negative equity.
Q: Will refinancing always lower my monthly payment? A: Not always. You may spread the term longer or pay more interest overall even if monthly drops.
Q: Does refinancing affect my credit score? A: A new credit inquiry may temporarily dip your score, but managing the new loan well should improve it over time.
Q: What happens to the balloon payment I still owe on a PCP? A: If you refinance, you’ll likely roll that balloon into the new loan or decide to pay it off separately.
Q: How do I compare new deals? A: Compare APR, term length, total cost of credit (interest + fees), and check the new lender’s eligibility criteria.
Q: Can I refinance if my car has lots of mileage or is older? A: Possibly — but expect less favourable terms. Lenders prefer cars under certain age/mileage thresholds.
Q: Should I refinance just to reduce payments if I plan to sell soon? A: Probably not — refinancing adds new costs and you may pay more interest. For short‑term ownership, it may not be worth it.

🧾 Final Thoughts

Refinancing your car can be a clever move — if you’ve done your homework and you’re really in a position to benefit. The lower monthly payment may look good, but check for: