Car finance refinance

Refinancing is a tool, not an improvement in itself. It helps in a few specific situations and quietly costs money in others. The honest test is simple: add up everything you would pay from today under the current agreement, then add up everything you would pay under the new one. If the second number is not lower, the only thing you are buying is breathing room — and that is a valid reason, but you should know that is what you are doing.

1. 1

   Request your settlement figure

   Your lender must provide it. It's the amount required to clear the agreement today and is usually less than the sum of your remaining payments.

2. 2

   Add the remaining payments you'd otherwise make

   That's your baseline total cost from today under the existing deal.

3. 3

   Price the new agreement on the settlement amount

   Include any arrangement or transfer fees, and use the total payable figure rather than the monthly.

4. 4

   Compare the two totals

   If the new total is higher, refinancing is buying you a lower monthly payment at a cost. Decide with that in view.

Notice what did the work in that example: the rate, not the term. Extending the term always reduces the monthly payment and almost always increases the total. When a refinance is presented purely as a lower monthly figure, the term is usually where the trick lives.

This is the most common genuine reason to refinance. At the end of a PCP you owe the balloon — the guaranteed future value — if you want to keep the car. Most people do not have that sum sitting available, so the choice is to hand the car back, part-exchange, or refinance the balloon into a new agreement.

Refinancing the balloon usually means a hire purchase agreement over two to four years secured on the same car. It works well when the car is worth more than the balloon, because you have equity and the lender is well secured. It works less well when the car is worth less than the balloon — in that case handing it back is normally the better financial outcome, and it is exactly what the guaranteed future value exists to protect.

Negative equity means the settlement figure is higher than the car is worth. Rolling that shortfall into a new agreement is possible with some lenders, but it means borrowing money against nothing — you start the new deal already behind, and the position usually gets worse before it gets better.

Before refinancing in that position, check whether voluntary termination applies. Under the Consumer Credit Act, once you have paid at least half of the total amount payable on a regulated HP or PCP agreement, you have a statutory right to end it and return the car, subject to it being in reasonable condition. It is a genuine legal right, not a lender concession, and in some situations it is far better than a refinance.

• Ask the lender in writing what your 'half of total amount payable' figure is and whether you have reached it.
• The car must be returned in reasonable condition for its age and mileage; damage can still be charged.
• Arrears are still owed after voluntary termination — it doesn't wipe missed payments.
• Voluntary termination is recorded on your credit file and some lenders view it less favourably than a completed agreement.