As the cost of living crisis continues, many Brits are looking for ways to reduce their monthly expenditure. In a recent survey by the Office for National Statistics, three in ten respondents reported dipping into their savings to tackle rising costs.
With car ownership being one of the largest areas of expenditure for many across the country, reducing monthly car finance payments could be a good option for some.
Below, Lucy Sherliker, Head of Customer at Zuto car finance explains what it means to refinance your car and lists some key things to know before deciding if this is the right option for you and your financial situation.
So what exactly is car refinancing?
Lucy explains: “Car refinancing is when you take out a new finance agreement to help pay the outstanding amount left on your car finance loan, under different terms. It is also available for people with finance on PCP who need help with making the balloon payment at the end of their term.
“Whilst it might not be suitable for all car finance customers, it can be helpful if your circumstances have changed since originally applying, particularly in light of the current economic climate.”
If you are currently reviewing your monthly payments and looking to refinance your car, here are some key things to consider before making a decision.
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You can lower your monthly payments
Lucy explains: “The most common reason people look to refinance their car is because of a change in personal circumstances. As more people are feeling the impact of the cost of living crisis, some may be looking for ways to make their car finance repayments more affordable .
If you find yourself in this position, refinancing could be a good opportunity to switch to a different agreement that enables you to pay lower monthly payments over a longer period.”
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It can help you to keep your car
Lucy says: “Whilst many customers use car refinancing to lower monthly payments, it can also help you to pay off the remaining balance at the end of a PCP contract. With PCP, you will need to either give the car back at the end of the agreement or make a balloon payment to keep the car permanently.
“Refinancing is available for this balloon payment, helping you to keep your car without having to find a lump sum.”
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You’ll need to gather all the right documents
Lucy advises: “As with your original car finance agreement, you will need to provide several documents when starting the car refinancing process.
“The exact documents required will differ from lender to lender but generally you’ll need proof of address, proof of income, employment details, vehicle registration and driver’s licence. Make sure to gather these ahead of time to make the process as easy as possible.”
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You may experience a temporary change in credit score
Lucy adds: “It is really important to note that when refinancing your car, as with any finance agreement, you may experience a change in credit score. Typically, your credit score will have a slight drop following a hard credit search but this is usually only temporary if you continue to make repayments on time.”
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Refinancing your car could reduce your interest rate
Lucy says: “For some, one of the benefits of car refinancing can be a reduced interest rate. If your credit score has improved since you originally applied for car finance, you may find that you’re eligible for a loan with lower interest rates, helping to reduce the overall amount payable.”
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You can refinance your car even if you’re in negative equity
Lucy says: “Negative equity happens when your car is worth less than the amount you still owe in loan repayments. This usually happens when the car has depreciated at a much faster rate than expected.
“If you are in this position, you can still refinance your car although the new agreement will be based on your outstanding balance, and not the vehicle’s value.”
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