Car refinance explained
If you have taken out finance in order to purchase your car, you may be able to refinance onto a different deal. There are various reasons you may do this, such as lowering the interest rate, the monthly payment, or helping to finance a balloon payment if you have a Personal Contract Purchase (PCP) deal. Refinancing may benefit you if your credit score has improved, you didn't shop around for your original deal, or other circumstances have changed.
Refinancing involves getting a new finance agreement and using this to repay your existing agreement.
Motiv considers a range of finance types to try and help you find the most suitable option when refinancing your current deal, and you can easily check for a deal without affecting your credit score.
Below we go through the key steps and highlight a number of considerations you should assess when working out if refinancing is suitable for you.
1. Understand your existing finance deal
It is important to understand your existing finance deal when considering refinance. Your credit agreement will have key information such as: offer type, APR and monthly payment. This is useful, both for comparing your existing deal vs. any refinance deal and to help Motiv estimate your settlement figure if you haven't requested that from your existing finance provider. Some finance deals come with certain consumer protections, that you should also consider.
2. Get your settlement figure, or use the Motiv calculator for an estimate
To refinance, you will need a settlement figure from your current lender. Check with the lender how to do this as it can vary, for example, some have online processes and in some cases you may need to call them. Getting your settlement figure can take a few days so Motiv have also built a calculator that will estimate your settlement figure. You just need to ensure you have the right information to hand, so your credit agreement for your existing deal might be useful.
3. Check to see if you could refinance and compare vs. your current deal
Use the Motiv refinance tool to understand what deals are available from Motiv's panel of finance companies. You can compare the refinance offer (if you receive one) to your existing finance deal.
4. Consider your options
Once you have your refinance option it's now worth ensuring you understand the key considerations to decide if refinancing is suitable for you.
There are several areas for consideration and two key ones are discussed here:
- Financial – how will the refinance deal affect the interest you are charged and your monthly repayments?
- Rights & options – how will the refinance deal change any rights and options you have?
The below table aims to help you understand the financial impact of the refinance deal based around how the key terms of APR and monthly payment are changing:
|APR change||Monthly payment change||Considerations|
|Same or higher||-||
Rights and options
Depending on the type of deal you are refinancing from and to, the way your rights and options are affected will differ. The below table aims to explain some of the main considerations. If you have any further questions around these, we suggest you speak to the finance company offering the refinance deal:
|Current deal||New deal||Refinancing considerations|
|Hire Purchase / Personal Contract Purchase (PCP)||Personal Loan||
|Hire Purchase / Personal Contract Purchase (PCP)||Hire Purchase||
5. Proceed with the refinance offer
Once you've weighed up if the refinance offer is for you, and if you decide it is, you can then proceed to submit your final application with the new finance company.
The exact process will vary by finance company but typically you will need to:
- Request your settlement figure from your current lender if you haven't done so already. This figure will then help finalise the details of your refinance deal
- Complete any final information & checks on yourself that the new lender requires
- If refinancing onto a Hire Purchase agreement, complete any checks on the vehicle the new lender requires, for example, to confirm condition and ownership
- Complete any paperwork required to take out the new agreement
You'll need to ask your current car finance lender to provide your settlement figure before you can complete your switch. They can usually do this over the phone, via email (which takes approx. 2-3 days) or by post (which takes approx. 7 days). A settlement figure is valid for 28 days from the date you request it.
As getting your settlement figure can take a few days, Motiv have also built a calculator that will estimate your settlement figure to help you search for a cheaper deal.
We'll use the information you provide to us, alongside some assumptions, to estimate your settlement figure. This includes consideration for fees and any rebate on interest charges, and is inline with the relevant UK legislation – specifically "The Consumer Credit (Early Settlement) Regulations 2004".
The assumptions we use in our estimate calculation are:
- You are up to date with your repayments
- Your current finance agreement came into effect on the first day of the month in which it started
- Your repayments are made on the last day of the month (and when you're estimating your settlement figure on the last day of any given month the latest repayment has already been made)
- Any balloon payment is due on the last day of the last month of the agreement
- The settlement date is 28 days from when the estimate is calculated
- Your lender will charge a "compensatory amount" (sometimes referred to as an early repayment fee or early settlement fee) and this calculated from your outstanding loan after your most recent repayment. This amount is assumed to be in line with the relevant UK legislation – specifically "The Consumer Credit Act 1974"
Repaying the finance
For all regulated Personal Loan and Hire Purchase agreements under £25,000, you can usually cancel within 14 days of the agreement being signed. This period is often called a "cooling off period" and the lender will provide you with details of the specific process you would need to follow in order to do this. It will involve you repaying the finance in full (whether in cash or via an alternative finance arrangement). If the loan is for £25,000 or greater Motiv recommend you speak with the lender directly regarding your rights.
Beyond 14 days, all regulated credit agreements allow for “early settlement”. If you wish to do this, you should contact the lender (ideally in writing) and ask them to tell you the total amount you must pay to clear the loan in full. This is amount is called an “early settlement figure” and once you have this to hand, you'll have 28 days from when they received your request to pay the amount off in full. Note that when calculating the early settlement figure, the lender is required to include a rebate for a portion of the interest charges that is yet to be incurred (the exact portion depending on how close to the end of the agreement you are).
If you have refinanced on to a regulated Hire Purchase agreement you may be able to "voluntarily terminate" – a right that is offered to consumers under UK Law once you have paid more than 50% of the total amount payable (which should be noted in your credit agreement). With this option you would hand the car back to the finance company and would not be liable for any further repayments.