How to Refinance a Car Loan

Published : 6 years ago, on 18/07/2018

Refinancing can help, whether a person wants to keep the car beyond its present finance agreement or when a person is looking to reduce monthly payments.

Instead of having to come up with a large amount of money to pay off a lump sum and keep the car, refinancing can spread the cost.

Refinancing at the end of a PCP agreement 

If a person wants to keep the car at the end of a PCP finance agreement, then one has the option of buying it for a lump sum. In simple terms, PCP is a type of hire purchase agreement usually suitable if you want to keep a low monthly payment and like to change your car frequently.

However, this can be a hefty amount over a period of time. Refinancing allows spreading the cost when a person cannot stretch to the lump sum payment.

When a person refinances a car, she/he effectively buying it on finance again – as a second-hand model. One has a new finance agreement for a set term and a new monthly payment.

The major difference is that the payment will usually be considerably cheaper than before because the person is only financing the cost of that lump sum.

Refinancing your car early 

It may be possible to reduce the monthly payments by cancelling the current arrangement and taking out a new one, which spread the cost over a longer period or might offer a lower interest rate.

As well as PCP finance, this is also an option if a person has Hire Purchase finance, which results in owning the car at the end.

Refinancing a leasing agreement

A person can’t change the payments one make while leasing a car because this is a form of long-term hire, with a set monthly rental cost.

Refinancing a car that is less than four years old

A person should be able to refinance by taking out a PCP agreement if the car is less than four years old.

The monthly payments will be lower than if took on HP finance, and a person will have three options at the end: a person can hand it back and walk away. The option of buying the car on lump sum will still be available. The cost is based on a rough estimate of the car’s value at the time, so should be much more affordable once it had been through two finance agreements. A person may also have the option to refinance again.

Refinancing a car that is more than four years old 

PCP is less common with car that is more than four years old because lenders find it difficult to predict how much it is going to be worth in the future. Therefore the refinancing options on older models are usually restricted to Hire Purchase.

Because monthly payments on older cars are usually much cheaper than with newer models, a person should still find himself paying less – even if it comes to the end of a PCP deal and refinance to HP.

Advantages of Refinancing 

• The person may pay less each month, and over the full term as well.
• Refinancing over a longer term should reduce the monthly payments.
• Refinancing at the end of a PCP allows the person to keep a car without paying a lump sum all at once.