How to Refinance Your Car Finance

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 the first thing to check is that figure — use the settlement calculator. Then compare the new deal against what's left on your old one, on total cost rather than 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 balloon if you want to keep the car — 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 — 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.

1. Ask your lender for your current settlement figure under section 97 of the Consumer Credit Act 1974.
2. Check your credit file and the rate you'd likely be offered.
3. Compare new deals on APR and total cost, not just the monthly payment.
4. Apply for the new finance and use it to settle the old agreement.
5. 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 rate over the same time means less total interest.

Compare the total interest on both deals with the refinance calculator. If the new total amount payable is lower, you're winning; if it's higher because the term is longer, you're not — even if the monthly drops. The total amount payable is the only number that tells the truth.

The sweet spot is 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.

Worked example: refinancing to a lower APR

The maths only works one way: a lower APR over a similar term saves you money. Here's a typical case.

Now flip it: refinance the same balance to 9.9% APR but stretch the term to 60 months. The monthly drops to £210, but the total interest rises to about £2,620 — more than you'd have paid on the original deal. The smaller payment hides a bigger bill.

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 — effectively 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 check, which briefly dents your credit score. That's minor for a single application, but multiple applications in a short window look like desperation to lenders. Use eligibility checkers (soft searches) to find your likely rate before applying for real.

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 isn't always cheaper 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.

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.

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 cost 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 whole exercise. 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.