As per Morgan Stanley automotive analyst-
“Around 4 out of 5 new cars in Britain are today purchased on finance.”
He believes that the current status of car credit in the UK is £41 billion. It is lower than last year (£54 million). Cases of returning the cars on finance or car finance agreement withdrawal rose this year. It is because of the country’s recession blows.
However, new ways of providing car finance flexibility reveal the development potential.
According to Finance & Leasing Agreement reports,
“Despite the recession, 82% of new cars in Britain are bought with contracts under PCP agreement.”
The agreement is popular because it requires a cash deposit on a new car and pays cash payments and instalments until the agreement. Ultimately, the borrower can buy the car with a balloon payment or hand over the car. Most borrowers use equity earned on the car as a downpayment if they want to switch to a new PCP agreement.
However, most individuals wish to refinance the agreement before switching to a new agreement. It can be because of different reasons. As per Equifax:
“Most individuals consider refinancing a car to get better interest rates.”
It not only helps lower the repayment amount but saves money too.
The blog lists the best ways to refinance a car loan. It discusses the definition, pros and cons, and whether to refinance a car loan.
What does car refinancing mean?
Car financing implies taking out a new credit agreement and paying off an existing balance on the car. One can either apply with the same lender or check a new one. Here one agrees to fresh terms. Individuals consider refinancing if they struggle to pay the debt or want to benefit from the reduced interest rates. The new agreement is more favourable than the existing loan.
Last year you purchased a car on finance for £20000. A lender loaned you this amount at a 6% interest rate. You need to pay it back within 48 months. 12 months later, your financial situation improves you decide to refinance.
So, you got a new agreement with a 3% interest rate and 48 months repayment structure. Thus, you will pay the loan in 6 months (48+12 months) to the lender. With refinancing you would pay 22,040 after 12 months and without refinancing
So, you got a new agreement with a 3% interest rate and 48 months repayment structure. Thus, you will pay the loan in 6 months (48+12 months) to the lender. With refinancing you would pay 22,040 after 12 months and without refinancing you would pay £505 extra.
Every car finance deal is unique. Individuals have different circumstances. One may benefit from this deal, while another may not. It is the reason lenders analyse affordability and score before proceeding with the loan.
Pros and Cons of Refinancing a Car Loan
While you may be considering refinancing a car loan, it has some cons. If the car finance agreement does not suit you, it may impact other big life decisions. It is essential to analyse the advantages and disadvantages of refinancing:
|PROS OF REFINANCING A CAR LOAN||CONS OF REFINANCING A CAR LOAN|
|Shorten the loan term and lower interest payments If you want to refinance a loan, the new agreement would be shorter than the previous ones. It implies you can save interest costs and additional loan fees. It incredibly reduces the overall loan costs.||You pay more by refinancing to a longer-term Refinancing in the long term may not always be beneficial, especially when you have a poor credit score. It may reduce monthly payment costs, but eventually, you pay more interest.|
|Tap the equity in your car If you need cash, you can use the equity build-up on the new car on finance. If your car is worth £20000, and you still need to pay £10000, you can refinance the existing loan to £15000 and get £5000 in cash. In this way, you can capitalise on the equity built.||High-interest rates It may prove a costly alternative if you seek car loan refinancing at a lower credit score. It is challenging to get on a bad credit rating. Even if you get one, you may not benefit drastically from it.|
|Pay off the loan early If your income increases, you can refinance the loan to a shorter term and pay it off. It will help you take on the next big goal and save overall loan costs.||Pre-payment penalties Many car finance providers entail pre-payment or overpayment penalties on the car finance or loan. Thus, before refinancing it for this reason, know the lender’s terms in detail.|
Step-Wise Ways to Refinance a Car Loan
It is always ideal to prepare before refinancing your car loan. If clueless about all of it, the below steps may help you.
STEP 1 – DECIDE WHETHER REFINANCE IS THE RIGHT MOVE
Refinancing may be an ideal way to grab better interest rates, reduce loan costs or pay the loans early. However, not apt for every circumstance.
When should you avoid refinancing a car loan?
Do not refinance a loan if:
When should you consider refinancing a car loan?
Likewise, there are some financial and credit situations where refinancing a car loan may make sense:
If you have any of these reasons, you can proceed ahead
STEP- 2 – REVIEW THE TOTAL AMOUNT TO PAY ON CURRENT LOAN
Most lenders require at least £5000-£10000 as a pending amount on the existing agreement. If yours is less and approaching the loan term end, refinancing won’t help.
Alternatively, refinance the car loan if you have over £10000 pending with over a year left. Finishing off the existing loan is better than refinancing to a new agreement if you have less time frame.
Apart from calculating the total amount, analyse the total interest, monthly repayment and total loan costs. It is essential if refinancing a car with a bad credit score. It would help you compare the prices better.
TIP: YOU CAN ALSO USE A LOAN REPAYMENT CALCULATOR TO UNDERSTAND YOUR CURRENT PAYMENTS AND COMPARE OPTIONS
STEP -3 – CHECK YOUR CREDIT SCORE
As per an expert,
“Good credit score can help you refinance a car loan at lower interest rates and costs.”
Your credit history and credit score are the primary factors determining refinancing possibilities. If you made smart financial decisions like:
- Paying the repayments timely
- Clearing credit card debts monthly
- Have no bad debt
- Made regular bills and subscription payments
If your profile reveals these signs, you may qualify for better refinancing quotes. Alternatively, if refinancing for a low credit score, improve your credit score. Do so before approaching the car loan.
STEP 4- CALCULATE THE CAR’S VALUE
As per Nimble fins,
“An average price of a car in the UK is- 36000, depending on the size, car model, and specifications. And an average household spends around 1,100 on maintenance.
Thus, it is important to analyse the car value to benefit from the refinancing. Calculating the car value would help you borrow right.
STEP 5- GATHER RELEVANT DOCUMENTS
Organising documents ahead of time may help you avoid last-minute troubles. Here are some documents that you must keep handy:
- Driving license
- Insurance proof
- Pay stubs
- Your SSN
- Copy of the original contract
Your new lender may demand a few details like:
- Remaining balance
- Current monthly payments
- Interest rates you pay
- Vehicle Identification Number
- Statement of a loan pay off amount from your current loan provider
STEP -6 – PREQUALIFY WITH THE RIGHT PROVIDER
Identify different lenders after calculating and arranging the documents. While comparing, consider aspects like:
- Interest rates
- Loan fees
- Final agreement terms
- Overall loan fees
- Missed payment fees
- Pre-payment charges
Seek pre-qualification if you find an apt one that aligns well with your income and situation. It will not impact your credit score.
Refinancing a loan can impact your finances. Thus, identify the aptness of the move by addressing the above-listed concerns related to car loan refinancing. If you find it apt for your situation, identify the best match for your finances and credit score. Car refinancing is ideal for good credit and income profiles seeking low-interest or early payments. Analyse the purpose before applying.
Lisa Ann has developed a well-experienced professional career. From managing the staff of more than 50+ loan experts at Fastmoneyfinance to boosting the delivery of various loan offers, she has acquired many challenging roles to come out with the best results for the company. Lisa Ann is a Senior Content Author and the Chief Financial Advisor at Fastmoneyfinance. To back her massive experience in the UK’s financial industry, she has the postgraduate degree and diploma in Business and Finance.