• 2023-09-15 08:00:04
  • >15

    Sep

How to Refinance Your Car Loan

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Often, our financial situation will change over time, so the agreement you made months ago might not now be the best one. Refinancing your car loan can mean you can access better car finance deals and a car finance agreement that suits your current needs.

Below, we explain exactly how you can refinance your car loan and also establish whether refinancing will be right for you.

What does refinancing mean?

Refinancing means financing something that you have already financed. Typically, the new finance deal will be with a new lender that can offer additional benefits, such as better interest rates,

You can refinance with Personal Contract Purchase (PCP) Car Finance or Hire Purchase (HP) Car Finance, with your car used for collateral. You can also refinance your car finance by getting an unsecured loan and paying off what remains on your car finance deal.

What are the benefits of refinancing your car loan?

The main benefit of refinancing your car loan is that another lender could give you better interest rates. This will mean your monthly payments will be lower than what you’ll be paying currently. It might be that your situation has changed since you got the initial car finance deal, such as your credit score has improved, meaning you can access better interest rates.

Alternatively, you might be in a better financial position, so you can afford to pay larger monthly payments. In this case, you might be able to refinance your car with an agreement that has a shorter repayment term. This way, you can pay your car loan off quicker than with your original finance deal and you’ll also likely end up paying less interest over time. Once you’ve paid off your car finance, you’ll own your car and will be able to sell it or modify it as you please.

Are there any disadvantages to refinancing your car loan?

Refinancing doesn’t guarantee you’ll have access to a better deal. Factors such as the current economic climate can affect what interest rates are available to you. If interest rates are generally high, you might be better off sticking with your current finance deal to avoid paying extra.

Many car finance providers have an early settlement clause in their agreements. This means there will be a fee to pay if you pay your car finance off before the agreed time period. When you refinance your car, you’ll be paying off the initial agreement with your first lender and transferring to another lender. So, even though you’ll still be paying the monthly costs, the original lender will deem their agreement settled.

Sometimes, you might end up paying more overall when you refinance. You might have lower monthly costs, but if you have a longer loan period, you’ll have paid more over time. This might be the best option for you if a change in your situation has meant you have less money each money, but you should carefully consider what will be right for you.

Steps to refinance your car loan

Think about if refinancing is right for you

Your first step should be to weigh up the pros and cons of refinancing your car loan. Consider what factors apply to your specific situation, and whether your finances are set to change in the future or if you should be consistent for the period of a new agreement.

Check your credit score

You should check your credit score before you apply for a new loan. Ideally, your score will be better now than it was when you applied for your original loan. This will mean you’ll be more likely to access better interest rates and the best car finance deals. If your score is bad, it might make more sense to wait until it has improved.

You can read our article on why your credit score is important when buying a car for more information about how your credit score affects your car finance and how you can improve your score.

Review your current loan

You should check the terms of your current loan. This will give you an idea of what sort of costs will be involved if you settle early. You can then calculate whether it makes financial sense to refinance or if you would be better off sticking with your current deal.

You should also establish how much is left to pay under your current agreement and how much time would be left to pay.

Value your car

Knowing the current value of your car will be a big help when it comes to refinancing your car loan. The new lender will likely carry out their own valuation, but getting an idea beforehand will help you to know where you stand.

If your car is worth less than what you have left to pay on the loan, this is known as negative equity. It can be more of a challenge to refinance a car with negative equity, but it’s not impossible, especially if you have a good credit score.

Gather your documents

When you apply to refinance your car loan, there are a number of documents you’ll need. Gathering these in advance can help the refinancing process to go forward smoothly and efficiently.

You’ll likely need:

  • Valid driver’s licence
  • Vehicle registration certificate
  • Certificate of car insurance
  • Proof of income (e.g., pay slips, bank statements)
  • Proof of address

Shop around for the best offer

You should always make sure to shop around and compare quotes from different lenders. You can often get quotes from car lenders without it affecting your credit score – just make sure they’ll be doing an estimate with a soft check, and not a hard check on your credit report.

This will give you an idea of how much your refinancing will cost, but you should bear in mind that it might change once they do a full hard check. Having too many hard checks on your report will negatively affect your credit score, so you should only proceed with an application once you are sure the lender is offering you the best deal.

Make sure that the lender is offering what you are looking for, whether that’s better interest rates, a lower monthly cost, or a shorter loan period.

Apply for your new loan

Once you have found your new lender that has what you need, you can then apply for the refinancing loan. You’ll receive the agreement documents to sign and complete the deal.

Then, depending on what has been agreed, the new lender will either pay off your loan with your original lender or give you the funds to pay it. It can be beneficial to check that your original loan has been completed if the new lender has said they will pay it on your behalf.

Once your new agreement is finalised and signed, you can start paying off your new monthly payments.

GetCarFinanceHere here can find you the best car finance deals from our network of lenders. We look at each person’s individual situation, which means we can offer bad credit car finance for those with a low credit score. Apply for car finance today.  

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