Best Car Refinance: How to Choose the Right Option

Who This Guide Is For

If you currently have a car on finance and are wondering whether a better deal could be within reach, this guide is for you. Perhaps your financial situation has changed, your credit score has improved, or you simply want to reduce your monthly payments. Maybe you’re a first-time car buyer confused by the jargon or someone who feels their current agreement doesn’t suit their needs.

In the UK, car finance refinancing is an increasingly popular way to take control of your motoring costs. This guide will help you make sense of your options, avoid common pitfalls, and empower you to make informed decisions—whether you’re looking for lower interest, more flexible terms, or just peace of mind.

Simple Definition of Car Finance Refinancing

Car finance refinancing means replacing your current car loan or finance agreement with a new one—ideally on better terms. This could involve switching lenders, negotiating a lower interest rate, extending the repayment period, or changing the type of finance altogether.

In essence, refinancing is a financial reset button. You pay off your existing car finance with a new loan and then make payments towards the new agreement, which should be tailored to your updated needs or financial circumstances. The aim is usually to save money, reduce monthly outgoings, or gain more flexibility.

Why Car Finance Refinancing Matters

Car finance is, for many, the second largest financial commitment after a mortgage. Yet, unlike home loans, car finance agreements are often taken out without much thought to future changes in personal circumstances or the finance market itself.

Refinancing matters because it gives you the chance to:

• Lock in a lower interest rate if your credit score has improved or market rates have fallen

• Reduce your monthly payments by spreading the cost over a longer period

• Pay off your agreement sooner, if your finances have improved

• Switch to a finance product that better suits your needs (for example, from PCP to HP or vice versa)

According to the Financial Conduct Authority, many UK drivers could save hundreds of pounds by reviewing their car finance options. Yet, the process can seem daunting. This guide aims to clarify your choices and highlight the potential benefits and risks.

How Car Finance Refinancing Works (Plain English)

Let’s break the process down into simple steps:

1. Review Your Current Car Finance Agreement

Before you consider refinancing, gather the details of your current deal:

• Type of agreement (PCP, HP, personal loan, etc.)

• Outstanding balance (the amount left to pay)

• Settlement figure (how much you need to pay today to clear the agreement)

• Interest rate and monthly payment

• Early repayment fees or exit penalties

2. Understand Your Financial Position

Check your credit rating. If it’s improved since you took out your current finance, you’re more likely to be offered better rates. Calculate how much you can comfortably afford to pay each month.

3. Shop Around for New Deals

Approach different lenders or use a broker like Kandoo to access a wide panel of options. Compare:

• Interest rates (APR)

• Term lengths (how many months)

• Total repayable amount

• Fees and charges

4. Application and Approval

Once you’ve found a suitable offer, you’ll need to apply. The new lender will conduct a credit check and, if approved, pay off your existing finance directly or provide you with the funds to do so.

5. Start Your New Agreement

You’ll now make payments to your new lender under the new terms. Remember to cancel any direct debits relating to the old finance.

Key point: Always read the small print and ensure you understand the total cost—including any early settlement fees on your current agreement and arrangement fees on the new one.

Things to Know Before You Apply

• Early Settlement Fees: Your current lender may charge a penalty for ending your agreement early. Check this figure carefully—it can affect whether refinancing is worthwhile.

• Vehicle Value: If your car’s market value has dropped below the settlement figure (negative equity), refinancing can be trickier, but not impossible.

• Credit Checks: Multiple hard credit checks in a short period can impact your credit score. Use eligibility checkers that perform ‘soft searches’ where possible.

• Loan Term Extension: While spreading payments over a longer period reduces monthly outgoings, it can increase the total interest paid.

• Type of Finance: Not all finance types are equal. Ensure you understand the differences between PCP, HP, and personal loans.

• Documentation: Lenders will require proof of income, identification, and details about your vehicle.

Jargon Buster (Key Terms Explained)

Pros and Cons

Pros

• Lower Interest Rates: Potential for significant savings if you qualify for a better rate

• Reduced Monthly Payments: Free up monthly cash flow

• More Flexible Terms: Adapt the agreement to suit your current needs

Cons

• Early Settlement Fees: These can wipe out potential savings

• Longer Repayment Terms: Lower payments may mean more interest overall

• Credit Impact: New credit checks and accounts can affect your score in the short term

Alternatives You Should Consider

Before refinancing, consider whether another route might suit you better:

1. Overpaying on Your Current Finance: Some lenders allow you to make extra payments, reducing the overall interest and shortening the term, without needing to refinance.

2. Part-Exchange: If your car is worth more than the settlement figure, trading it in could help you clear the old finance and start afresh.

3. Personal Loans: An unsecured personal loan can sometimes offer lower rates and more flexibility, particularly if you have strong credit.

4. Voluntary Termination: If you’re halfway through your PCP or HP agreement and struggling with payments, you may have the right to hand the car back without penalty (subject to conditions).

5. Renegotiation: Speak to your current lender. Sometimes, they may be able to offer more competitive terms to keep your business.

FAQs

Is car finance refinancing right for everyone?

Not always. It depends on your circumstances, the terms of your current agreement, and what’s available on the market. Weigh the costs and benefits carefully.

Will refinancing hurt my credit score?

Applying for new credit typically involves a hard search, which can cause a short-term dip. Over time, responsible borrowing can help improve your score.

Can I refinance if I have negative equity?

It’s more challenging, but some lenders offer solutions. You may need to borrow more to cover the gap or provide a cash deposit.

Do I need to use the same type of finance?

No. You can switch from PCP to HP, or to a personal loan, depending on what’s best for you.

What documents will I need?

Usually, proof of income, proof of address, photo ID, and details of your existing finance agreement and vehicle.

How long does the process take?

Once approved, refinancing can be completed in a matter of days, but gathering paperwork and comparing offers can take longer.

Get Started or Learn More

Ready to explore your car finance refinancing options? Use Kandoo’s free eligibility checker to see what deals you might qualify for without impacting your credit score. Or, speak to our experts for tailored advice—so you can drive away with confidence and peace of mind.