Last updated: 23/07/2020 | Estimated Reading Time: 4 minutes
Refinancing your car
Refinancing is when you replace an existing loan repayment plan with a new one. There are many reasons people do this, and whether it’s a beneficial or damaging move for you will depend on a multitude of factors.
We’re going to talk you through the pros and cons of refinancing a car, and the cost to your wallet and credit.
In This Guide:
- Should I refinance my car?
- Interest rates
- How much does refinancing my car cost?
- How will refinancing my car affect my credit score?
- Refinancing with a better credit score
Should I refinance my car?
Many people decide that refinancing their vehicle is of benefit, and we’ll start by taking a look at some of the reasons why.
With refinancing, you can free up extra cash which can have a significant impact on your life. A new loan plan where you pay out a little less each month can enable you to have a bit more disposable income for when life throws surprises – and throw it does. On the other hand, paying off your loan quicker with bigger instalments will enable you to access better interest rates, meaning you save money overall.
It’s not uncommon to refinance for debt management reasons - you may find income retained from a new plan helps with settling other bills and necessities.
Comparing car finance plans may show that there are better deals out there, especially if your credit score has improved. We’ll talk more about this later.
Interest rates can fluctuate, and it may be time to revisit your plan. The lower the rate the better, but not everyone can get their hands on the best deals. When you initially took out the loan the best rates may have been out of reach.
But if your disposable income increases - say if you’ve got a promotion or moved house - then you can make bigger payments and not only pay off your loan quicker, but also be eligible for better interest rates. Instead of stretching out your repayment plan, you could refinance to make bigger payments over a shorter period of time, saving you money.
How much does refinancing my car cost?
There’s no one-size-fits-all rule here. It will always depend on your specific plan and circumstances. If you’re extending your loan term then you’ll pay more over time, even if you’ve bagged yourself a better interest rate.
How does this work? Say you have a year left to pay off your car, but you want to extend it to two. Even with a lower rate, you’re paying interest for twice as long, so over time your repayment could add up to more.
However, the money you save month by month could benefit you in other ways – you might be saving for a house deposit, with that extra money being an invaluable contribution and getting you onto the ladder faster. Instead of feeling the immediate pinch, you just pay it back for longer. Alternatively, if you get a good deal, it could cost you less.
How will refinancing my car affect my credit score?
Struggling to keep up with payments will impact your credit score, and not in a good way. And as soon as you miss a repayment, the pool of lenders willing to help you might diminish. So to keep your credit score ogle-worthy, it’s better to ensure all payments are made on time – even if they’re smaller. You’re sticking to a plan.
If you’re strapped for cash, refinancing your car could be a great option. Small consistent payments over an extended period of time is better than unpredictable or bouncing payments.
Refinancing with a better credit score
On the flipside, your credit score may have improved since your original plan was arranged. You may have consistently made repayments on your vehicle whilst also improving your credit rating in other areas of life, such as with being approved for a mortgage or credit card.
Therefore, you may be able to access better interest rates than you were initially given now having proved you’re reliable. Why not try and get the best deal?
Do bear in mind, however, that over-checking your credit score can be detrimental as leasers see it as representative of the need to borrow money, rather than shopping around out of personal interest. Therefore, if you know it’s improved, don’t check a further ten times - go for it.