When should you refinance your car?

Is now the right time to refinance your car?

Refinancing your car is when you replace your current loan with a new loan and new terms. Usually, your new refinanced car loan will have better terms such as lower monthly payments or a lower interest rate. But it can be hard to know when the right time is to refinance your car and it may not be possible if you’re car loan has not long started. Our blog below looks at how refinancing works and when it could work best for you.

When should you refinance a car loan? 

Refinancing your car is subject to your current situation and if it would be beneficial for you but here are a few examples of when refinancing would work best. 

Once you’re halfway through your agreement. 

The best time to refinance your car on finance is once you’ve made half of the repayments. Refinancing too early can be costly so it is advised you wait until you have paid at least 50% of the loan off. If you have a car finance agreement over 4 years, this will mean you should look to refinance after 2 years or once you’ve paid off half the loan value.

If your credit score has improved. 

As a car finance broker, we see many drivers take up finance with a low credit score. When you have bad credit, you may not get offered the most competitive interest rates around but securing a car loan may be the number one priority. If you improve your credit score by making all your car finance payments on time and keeping debt low throughout your agreement, you may be in a better position to refinance. Once you’re halfway through your agreement and have a better credit score, refinancing could get you a better interest rate than you first had when you took out the agreement and help to save you money. 

When interest rates are low. 

The interest rate you are offered for car finance is calculated based on a few personal factors such as your credit score and affordability but they are also in line with the current Bank of England rate of interest too. When interest rates rise in the UK, it makes borrowing money for a car more expensive as lenders set their interest rates in line with inflation. If interest rates have lowered and your credit has improved since your finance deal started, you could refinance your loan to a new one with a lower interest rate. 

You need to change the loan term. 

When you refinance a car, you can choose to shorten or lengthen the loan term to suit your needs. You may be looking to lengthen your loan term and reduce your monthly payments if your situation has changed, and you can’t afford the higher payments anymore. Similarly, you could shorten your loan term length and pay off the loan faster if you had extra money for a pay rise. Whatever your reason for changing the loan term length, you should consider that it will affect your interest rate. Usually, lengthening the loan term can increase the amount of interest you pay and shortening the loan term can make the interest fall.

Does refinancing hurt your credit score? 

When you take on any new credit, your credit score can take a knock. This is because the amount of debt you owe has increased. However, once you start paying back your new refinance loan, on time and in full, your credit score should get back to normal.