Car refinancing – can you cut the cost of your car finance by £100s or £1,000s?
If you have a car on a Personal Contract Purchase (PCP) or Hire Purchase (HP) deal, you may be able to refinance it to a cheaper loan, PCP or HP deal and save £100s or £1,000s in interest. This trial guide explains how it works, estimates the likelihood you'll save with our quick calc, then takes you through the two main routes to find cheaper deals.
This is a trial guide, not the final version, we've published it to get your feedback. We're trialling this new guide, we want to see if you understand it, and if the savings materialise – so please read it in that light and share your thoughts and experiences in the MSE Forum (both on the info in this guide, and how you found the process of refinancing). That way we can improve it to help more people
What is car refinancing?
Although it's little-done and little-known in the UK, car refinancing is exactly what it sounds like. You take out a new, cheaper loan or car finance deal to pay off an existing Hire Purchase (HP) or Personal Contract Purchase (PCP) deal.
Many who refinance their car save more than £1,500 in interest.
Follow our step-by-step guide to see if it's likely you can save too – the next step has a handy calc that estimates whether it's worth you putting the legwork in...
Step 1: Pay off the finance if you have enough in savings to do so
This won't apply for the vast majority, but if you do have enough in savings, and you're paying a material amount of interest on your car finance deal (ie, it's not on 0% finance) then you should consider paying off the loan with the savings.
Many baulk at this – liking the comfort of having the cash on hand 'just in case'. But, if you've savings over and above the amount you need in an emergency fund (Martin's rule of thumb is having three to six months of expenses saved), it's likely worth using them to pay off the debt. You can then divert an amount equivalent to your monthly car finance payment to rebuild the savings.
Do think carefully about this – more help's in Should you repay debts with savings?
Step 2: Use the 'is car refinancing likely to save me money?' calc
Whether you're likely to save by refinancing your car depends on your current interest rate, how long's left to go on your finance deal, how much you have left to pay off, whether your credit history has improved since you took your car finance deal out and whether you got a good deal first time around.
To help you decide if it's worth investing more time to see if you can save, we've built this handy ready reckoner. Just put in a few bits of information about your finance deal and we'll tell you the likelihood you can save...
Step 3: Do the two checks to see if you can cut costs
If the calculator suggests it's worth spending the time to see if you can save, do these two checks...
Check 1: Can you save with a loan?
Unsecured loans tend to be cheaper than car finance, especially if you've good credit, so it's worth checking your eligibility for a loan first. But, they only tend to be cheaper, it's not always true, so do both checks. For loans...
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Find the 'estimated settlement figure' you got in the results on the calculator in step 2 above (this is our estimate of the amount you'd need to borrow to pay off your current finance deal).
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Plug it in to our Loans Eligibility Calculator. This will tell you if you're likely to be able to get a cheap loan to pay off your car finance deal. Or if you're a member of MSE's free Credit Club, just log in there and go to the loans eligibility tab.
For ease of comparison, set the loan length to how long you've got left on your finance deal (unless you can now afford to repay quicker). At this point, you're looking for an indication of... -
Note your eligibility scores. Higher scores mean you're likely to get the loan, lower scores less so.
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Check the interest rates of the loans you've good eligibility for. And whether they're cheaper than your current car finance deal.
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Assess whether a loan is affordable for you. So, note the monthly payment of the cheapest loan you've good odds for.
If your results show you can likely save with a loan, it's still worth doing check two, just for belt and braces, as you may be able to save more. Yet if you're happy with the loan, jump to step 4 to see how to use the loan to pay off the finance.
If your current car finance is a PCP deal, it'll have a balloon payment at the end (which you choose at the end whether you want to pay). So the finance you're paying off is the difference between the price of the car – minus any deposit you put down – and the balloon payment.
With a personal loan, you're borrowing the total amount of finance you've got left to pay off, which includes the balloon payment. So, you may see a higher monthly payment in the eligibility calc, even if the interest rate on the loan is cheaper.
If this isn't affordable – or you don't want to own the car at the end of the deal (eg, you'd planned to trade in to a new PCP deal) – then head to check 2 just below to see if you can replace your current PCP deal with a cheaper one.
Check 2: If you can't get (or save with) a loan, see if you can get a cheaper car finance deal
There are specialist car finance lenders who will pay off your old car finance for you and set you up with a new deal with them – which, ideally, will be cheaper (though do see the warning above if you've currently got a PCP deal). Try...
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Motiv, via MoneySupermarket*. Motiv is a broker, so will search its panel of lenders to check if it can find you a cheaper deal. It'll also show you your chances of being eligible for a deal (it won't show deals you're not eligible for, or deals that are more expensive than your existing deal).
We've linked to it via MoneySupermarket as it has more lenders and some special deals there compared with going to Motiv direct. Note you may also see personal loans come up in your results, alongside PCP and HP deals. If so, always compare them to the results you got in step 3. -
Experian*. In our tests it came up with fewer results than the Motiv comparison, but it's worth a look for belt and braces.
Step 4: How to use your new finance to pay off your old finance agreement
How you do this depends on whether your indicative results in steps 3 and 4 suggest a loan or another car finance deal is cheaper for you (if neither are cheaper, stick with your current deal).
If a loan is the cheaper option...
Get your settlement figure from your current car finance lender. The calculator in step 2 gives an indicative settlement figure, but you now need to know to the nearest penny how much the lender needs to mark your loan as settled.
Some lenders may give you this online, but if not, call the lender up and ask "How much would it cost to settle my finance deal on x date in pounds and pence?" (give a date a week or so in advance to allow you to sort the new finance deal).Go back through the Loans Eligibility Calculator to check you can still get a loan for this amount. You can then click on the cheapest result and apply for the loan on the lender's website.
Use the loan to pay off your old car finance deal. Assuming you're accepted for the loan, the cash is often in your bank account within 24 hours. Pay the old lender online (or call it up) and settle the old car finance account.
Pay your (hopefully lower) monthly repayments to the new lender. It should set up a Direct Debit as part of the loan set up process, so there shouldn't be anything you need to do, except enjoy the feeling of having saved cash.
If a new car finance deal is the cheaper (or only) option...
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Get your actual settlement figure from your current car finance lender. The calculator in step 2 gives an indicative settlement figure, but you now need to know to the nearest penny how much the lender needs to mark your loan as settled.
Some lenders may give you this online, but if not, call the lender up and ask "How much would it cost to settle my finance deal on x date in pounds and pence?" (give a date a week or so in advance to allow you to sort the new finance deal). -
Give the new lender the full details about yourself and your car. This is where you apply for the finance (you may need to go back through the sites in step 3 again), and the lender will do the final checks on you, your credit report and your car to make sure everything's in order and it's happy to lend to you.
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The new lender will pay off your old car finance lender for you. So the money will never hit your account. The new lender will be the new owner of your car until the finance is paid off (you will remain the registered keeper, as before).
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Pay your (hopefully lower) monthly repayments to the new lender. It should set up a Direct Debit as part of the finance set up process, so there shouldn't be anything you need to do, except enjoy the feeling of having saved cash.
This is a trial guide, not the final version, we've published it to get your feedback. We're trialling this new guide, we want to see if you understand it, and if the savings materialise – so please read it in that light and share your thoughts and experiences in the MSE Forum (both on the info in this guide, and how you found the process of refinancing). That way we can improve it to help more people
Car refinancing FAQ
If you qualify for a new car finance product then you'll be able to say how long you want the deal to run, and this doesn't have to match how long's left on your current car finance deal.
However, this guide's about replacing a more expensive loan with a cheaper one to save cash. If you're paying for longer, you'll pay more interest, so it may be that in extending the term, you make your monthly payment more manageable, but you don't actually save money as you're paying it (and the interest) for longer.
However, if you're struggling to meet your car finance payments, this is one way of making them more affordable. If you are struggling, it's worth talking to your current lender to see if it's able to help you.
Most likely, yes.
The lenders and brokers on the sites above will generally have commission arrangements between them. Indeed, if there's a * on a link, MSE may get a payment if you follow that link and take out finance (see How this site is financed for more).
If you take out a new car finance deal, you should be able to see how much the commission is (if there is any). You can then decide for yourself, relative to the amount you're borrowing, whether you think it's a fair amount.
It likely depends on what sort of credit problems you've had, and how far in the past they are. (Not sure how lenders will see you? Join our free free Credit Club, which gives you your credit score, report – and MSE's view of how likely you are to get credit in the real world.)
The main problem's likely to be getting new credit in the first place... although some lenders and brokers do specialise in lending to those with a poor credit history. However, even if you can get credit, your past problems may mean it won't actually be any cheaper (and could be more expensive) than your current deal.
But, if you use the calculator in step 2, it'll tell you if a saving's likely. And step 3 will tell you if you can get a cheaper deal. Note that there's little point refinancing to a more expensive deal.
As you're effectively just paying a monthly rental for your car, this method of refinancing won't work to save you money.
If you're struggling to afford your car lease payments, talk to your lender. It should work with you to find a solution.
Like any application you make for credit, when you apply for the new finance deal, there may be a minor negative effect.
However, if it's the only application you've made in the last few months, the effect of it on any other application you make will be negligible (lenders just don't like to see too many applications bunched up in a short space of time, as it makes you look like you're desperate for credit.
Assuming you paid your monthly instalments on your previous car finance deal on time, and you pay them on your new finance deal on time too, this should combine to have a positive effect on your ability to access credit, as other lenders will be able to see that you're managing your credit accounts well.
Yes. Even if your old car finance deal is fully paid off, you can still submit a complaint about it if it had a discretionary commission arrangement (the link has full info about how to check and complain). You would also be able to reclaim undisclosed fixed commission if your complaint falls in to that category – again, the link has all the details.
Can I refinance my car to lower my monthly payment and/or extend my term?
Will I pay commission on any new car finance deal?
Can I refinance my car if I have bad credit?
My car's leased – can I save money?
Will doing this affect my ability to access credit?
Will I still be able to reclaim commission on my old car finance deal if it was mis-sold?
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