Is It Worth Refinancing My Car After 12 Months?

Considering Car Loan Refinancing After a Year

Refinancing your car after 12 months could lower your monthly payments or reduce your interest rate. But is it the right move for you? We explore the factors that make refinancing worthwhile—or not—so you can approach the decision with confidence.

Who Should Consider Refinancing?

If your financial circumstances have changed, or if you suspect you could qualify for a better rate, refinancing might be suitable. This guide is tailored for UK car owners with at least 12 months’ payment history, seeking to reduce costs or adjust their repayment terms.

Key Concepts and Terminology

Refinancing means taking out a new loan to pay off your existing car finance agreement. The new loan often comes with a different interest rate or term, potentially lowering your monthly payments or reducing your overall interest burden.

APR (Annual Percentage Rate): The total cost of borrowing, including interest and fees, expressed as a yearly percentage. A lower APR can translate into meaningful savings over the life of your loan.

Equity: The value of your car minus what you owe. Positive equity means your car is worth more than the outstanding loan balance; negative equity means the opposite. Negative equity can complicate refinancing.

Settlement Figure: The amount needed to pay off your current finance agreement in full. This figure is crucial when assessing your options.

Term: The length of time over which your loan is repaid. Extending the term can lower monthly payments but may increase total interest paid.

Refinancing Options After 12 Months

You generally have a few routes to refinancing:

• Personal Loan: Take out an unsecured loan to repay your existing car finance. This can be flexible, but rates depend on your creditworthiness.

• New Car Finance Agreement: Settle your current agreement and take out a new PCP (Personal Contract Purchase), HP (Hire Purchase), or conditional sale deal.

• Dealer Refinancing: Some dealerships offer refinancing packages for existing customers, sometimes with incentives.

• Online Lenders or Brokers: Specialist finance brokers (like Kandoo) can help you compare deals across multiple lenders, potentially securing more competitive rates.

When refinancing, consider whether the new deal’s total cost—including any fees—will actually save you money. Also, be aware that if your car has depreciated significantly, you may face negative equity, limiting your options.

Costs, Impacts, and Potential Risks

Refinancing can deliver savings if you secure a lower interest rate, but there are important factors to weigh:

• Early Repayment Fees: Some car finance agreements include penalties for settling early. Always check your contract.

• Arrangement Fees: New loans may come with admin or arrangement fees, which can erode savings.

• Credit Checks: Applying for new finance involves a credit search, which can temporarily impact your score.

• Negative Equity: If you owe more than your car is worth, you may need to pay the difference upfront or roll it into the new loan—which can be risky.

Ultimately, the savings from refinancing should outweigh the costs and risks to make it worthwhile.

Eligibility, Requirements, and Conditions

Lenders typically require:

• A minimum of 12 months’ payment history on your current agreement

• Good or improved credit score

• Proof of income and employment

• Details about your vehicle, including make, model, age, and mileage

• Positive or neutral equity in your vehicle

Some lenders have restrictions around car age or mileage, so check their criteria before applying.

Step-by-Step: How Car Loan Refinancing Works

1. Check your current settlement figure

2. Assess your car’s current market value

3. Review your credit score

4. Research potential lenders and deals

5. Calculate the total cost and savings

6. Submit your application and supporting documents

7. Await approval and settle your old loan

8. Begin payments on your new agreement

Pros and Cons to Consider

Pros:

• Lower monthly payments

• Reduced interest rate

• Adjust loan term for flexibility

• Access to improved loan features

Cons:

• Early repayment or arrangement fees

• Potential for negative equity

• Impact on credit score from multiple applications

• Extending loan term can increase overall interest

Carefully weigh the advantages against possible drawbacks before proceeding.

Things to Watch Out For

Before refinancing, scrutinise the small print. Early settlement fees can substantially offset savings. Compare the total cost of your current loan with the proposed refinance—including all fees. If your credit score has dipped, you may not qualify for a better rate. Negative equity can also make refinancing challenging, leaving you owing more than your car is worth. Finally, consider your long-term plans—if you’re planning to sell or upgrade your vehicle soon, refinancing might not be worthwhile.

Alternatives to Refinancing

• Overpaying on your current loan: Some lenders allow penalty-free overpayments, reducing interest.

• Renegotiating with your existing lender: They may offer a better deal to retain your business.

• Part-exchange or upgrading: Trading in your current car for a new finance deal can sometimes be more cost-effective.

• Debt consolidation: If you have multiple debts, a consolidation loan could simplify payments, though it may extend your repayments.

Consider all options before committing.

FAQs

1. Can I refinance my car loan after 12 months?
Yes, provided you meet lender criteria and your current loan allows early settlement.

2. Will refinancing affect my credit score?
Applying for finance triggers a credit search, which can cause a short-term dip, but on-time payments can improve your score over time.

3. Can I refinance with bad credit?
It’s possible, but you may not qualify for the best rates. Specialist lenders might help, but always check the total cost.

4. Are there fees for refinancing?
Yes, both your current and new lender may charge fees. Always check the terms to ensure refinancing is cost-effective.

5. Is there a limit on how many times I can refinance?
There’s no legal limit, but frequent refinancing can harm your credit score and may not be cost-effective.

6. What if I owe more than my car is worth?
Negative equity can limit your options. You may need to pay the difference upfront or roll it into the new loan, increasing your debt.

7. How soon can I refinance after taking out a car loan?
Some lenders require a minimum period (often 6-12 months) before you’re eligible to refinance.

Next Steps

If you’re considering refinancing, start by checking your settlement figure and credit score. Compare multiple offers and read the small print carefully. Use a reputable broker to access the full market and make a decision based on total cost, not just monthly payments. If in doubt, seek independent financial advice.

Disclaimer

This article is for informational purposes only and does not constitute financial advice. Always consult a qualified adviser or broker before making major financial decisions. Terms and eligibility criteria apply. Rates and products may vary.