With car refinancing, you take out a new finance agreement and use it to pay your current agreement. If you’ve taken out finance or a loan to buy your car, you may be able to refinance onto a better deal. This is especially the case if your credit score has improved or you didn’t shop around for your original deal.

With a better deal, you may be able to lower your interest rate and reduce your monthly repayments. Many people use a car loan to pay off the ‘balloon payment’ at the end of a personal contract purchase (PCP) deal.

A car refinance loan is simple. You take out a personal loan to cover the finance you’re currently paying on your car, whether personal contract purchase (PCP), hire purchase (HP) or a car loan. Make sure you:

• Request the settlement figure from your existing lender so you know exactly how much you’ll need to borrow
• Compare different deals from a range of lenders to find the most suitable option for you
• Investigate interest rates and monthly repayment figures to understand exactly what you can afford to pay

Once your existing finance is paid off using the new loan, you’ll need to meet the monthly repayments on your new loan.

It is possible to get a better deal with a refinancing loan. It depends on a range of factors, including:

• Your current deal and the interest you’re paying
• Your credit score: if it’s improved since you took out the original loan, you may be offered lower interest rates
• The current market: if interest rates have dropped since you took out the first loan, you may secure a lower rate on your new loan

Before you refinance, think about:

• Lower monthly repayments: if you refinance to a lower interest rate or a longer loan you can lower your monthly repayments.
• A shorter repayment term: by shortening the repayment term, you’ll pay it off quicker. Just remember, your monthly repayments will be higher.
• Owning your car quicker: if you’re on PCP or HP finance, you don’t legally own the car until you make the final payment. By taking out a personal car loan, you’ll own the car as soon as you make the lump sum payment.
• The current climate: if interest rates have risen, you may struggle to find a better deal than your current one.
• The overall interest you’ll pay: if your new loan is longer than your previous one, you may end up paying more interest over the term of the deal.

Checking your eligibility for a loan is often done using a soft search which should not impact your credit score. However, when you apply to the lender for any type of finance, lenders will often use a hard search on your credit history. This hard search can affect your credit score temporarily. But as you start to pay back the loan and meet your monthly repayments, this can help boost your credit score as it shows responsible borrowing.

No, you can’t refinance if your car is leased as car leasing doesn’t work like a loan. If you’re struggling to make the payments on your car lease, consider ending the lease or transferring it to a third party but make sure you are fully aware of any charges that might be applied by the leasing company before you make your decision.