Managing your finance
Refinancing replaces your current car finance with a new loan that clears the old balance, leaving you with a single new agreement. You then pay the new lender instead.
Worked example
You have £10,000 left over 36 months at 14.9% APR. Refinancing to 9.9% APR over the same 36 months cuts your monthly from about £342 to £320 and the total interest from about £2,300 to £1,530, a saving of around £770 before any early-settlement charge or new fee.
Refinancing car finance means taking out a new loan, such as a personal loan, to pay off your existing agreement, usually to get a lower APR or smaller monthly payments. It saves money when the new APR beats your current one over a similar term, so the total amount payable falls.
Refinancing at a lower APR over a similar term cuts your total interest. Stretching the term to lower the monthly payment can do the opposite and cost more overall, even though each payment looks smaller. The steps below show how to switch, and the worked examples show when the numbers favour refinancing.
How does refinancing car finance work?
Refinancing replaces your current car finance with a new loan that clears the old balance, leaving you with a single new agreement. You then pay the new lender instead.
The new loan pays off your existing settlement figure, so check that figure first on the settlement calculator. Then compare the new deal against what's left on your old one on the total amount payable, not the monthly payment.
Refinancing is common when interest rates have fallen since you took out the original deal, or when your credit score has improved and you now qualify for a better APR. It's also used at the end of a PCP to fund the optional final payment (the balloon, set at the GMFV) if you want to keep the car, in what is sometimes called a 'refinance the balloon' deal.
How to refinance your car finance
To refinance, get your settlement figure, find a better rate, then use the new loan to clear the old agreement. Follow these steps.
Get the settlement figure in writing and check its validity window, which is usually 10 to 28 days. Apply for the new finance within that window so the numbers don't drift. The new lender will usually settle the old agreement directly, but always confirm with both that the handover has happened.
- Ask your lender for your current settlement figure under section 97 of the Consumer Credit Act 1974.
- Check your credit file and the APR you'd likely be offered.
- Compare new deals on APR and the total amount payable, not just the monthly payment.
- Apply for the new finance and use it to settle the old agreement.
- Confirm in writing that the old finance is closed, then start paying the new lender.
When does refinancing save money?
Refinancing saves money when the new APR is lower than your current rate and you keep the term similar. A lower APR over the same term means less total interest.
Compare the total interest on both deals with the refinance calculator. If the new total amount payable is lower, you save. If it's higher because the term is longer, you lose, even when the monthly payment drops. The total amount payable is the figure that shows the real cost of each deal.
Refinancing pays best when rates have fallen, your credit has improved, or you originally took finance at a dealer's higher rate and can now beat it with a direct lender or bank. If your current APR is already low, refinancing may not be worth the fees and the hard credit check.
Lower monthly isn't always cheaper
Worked example: refinancing to a lower APR
The maths only works one way: a lower APR over a similar term saves you money. This typical case shows both sides.
Now flip it: refinance the same balance to 9.9% APR but stretch the term to 60 months. The monthly payment drops to £210, but the total interest rises to about £2,590, more than you'd have paid on the original deal. The smaller payment hides a bigger total amount payable.
Worked example: a worthwhile refinance
The costs and risks of refinancing
Watch for early settlement charges on the old deal, fees on the new one, and a longer term that quietly adds interest. These can cancel out the saving.
Your old lender may apply the 28- or 58-day deferment when you settle early under the Consumer Credit (Early Settlement) Regulations 2004, which works out at up to about two months of interest. Factor that in, plus any new arrangement fee, before deciding. If your aim is simply a smaller payment, see lowering your payments.
Refinancing also triggers a hard credit search, which is recorded on your credit file and briefly dents your credit score. That's minor for a single application, but several applications in a short window make you look like a higher risk to lenders. Use eligibility checkers (soft searches) to find your likely APR before you apply.
Fees vary by lender and product. Some new deals carry a completion or arrangement fee of a few hundred pounds; others waive it but build the cost into a slightly higher APR. Ask the new lender to quote both the fee-inclusive APR and the monthly payment, then compare the total amount payable across every quote. A 'no-fee' deal doesn't always have a lower total amount payable once you add up the interest.
Refinancing versus other options
Refinancing is one of several ways to change your finance. Pick the one that matches your goal.
| Goal | Best option | Why |
|---|---|---|
| Cut the interest rate | Refinance to a lower APR | Less total interest over a similar term |
| Lower the monthly payment | Refinance or extend the term | Either cuts the monthly, but extending adds interest |
| Clear the finance entirely | Settle in full | One payment clears it, with the statutory rebate |
| Hand the car back | Voluntary termination | If past 50%, caps your loss at the halfway point |
Working out your break-even month
Your break-even month is the point where the savings from the lower APR overtake the one-off costs of switching. If you'll keep the new deal past that month, refinancing pays; if you'll exit sooner, it doesn't.
Add up the costs of switching: the old lender's early-settlement deferment (up to about two months of interest under the Consumer Credit (Early Settlement) Regulations 2004) and any arrangement or completion fee on the new deal. Then divide that total by your monthly saving. The result is the number of months you need to stay on the new deal just to get back to zero. The lower your monthly saving, the longer the payback.
Run the same check against the total amount payable as well, because a lower monthly can disguise a higher total. If the new deal's total is lower than the old one's and you see the agreement through, you're ahead regardless of the break-even month; if it's higher, the break-even month is the only thing standing between a saving and a loss.
Worked example: break-even maths
Short remaining terms rarely pay
Refinancing with bad credit
Refinancing with bad credit is possible but the rate you're offered will usually be higher, which can wipe out the saving. Check the numbers before committing.
A lower credit score means lenders price you as higher risk, so the new APR may not beat your current one. Use an eligibility checker to see the rate you'd realistically get without a hard search, then run that rate through the refinance calculator against your current deal. If the total amount payable doesn't fall, refinancing isn't worth it. Consider lowering your payments or a direct conversation with your lender instead.
If your credit has dipped because of a missed payment, fix the root cause before applying. A single recent default can push the rate you're offered above the one you're trying to escape, which defeats the point of refinancing. See what to do after a missed payment and give your file three to six months of clean payments before you re-check your eligibility.
Your rights when refinancing
Refinancing is two transactions: settling the old agreement and opening a new one. Your rights under the Consumer Credit Act 1974 apply to both.
On the old agreement, you have the right to a free settlement figure within seven working days (section 97) and the statutory interest rebate. On the new agreement, you have a 14-day cooling-off period to withdraw after signing, plus the same early-settlement rights going forward. If you suspect the original deal was mis-sold with hidden commission, you may have a separate claim, which how to complain explains.
Frequently asked
What does it mean to refinance car finance?
Does refinancing car finance save money?
Can you refinance car finance with bad credit?
Are there fees for refinancing car finance?
Can you refinance a PCP balloon at the end?
Does refinancing hurt your credit score?
How do you work out if refinancing is worth it?
Is refinancing worth it if you've only got a year left?
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